THE LAW OF COMMERCIAL CONTRACT

Misrepresentation

(Sweeney & O’Reilly 2 nd Ed Chapter 3 pp 56 – 58 & Chapter 9 p 257)

THE LAW OF COMMERCIAL CONTRACT

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History

1880’s – Caveat Emptor – Let the buyer beware Court of Equity  Relief for fraudulent misrepresentation  Rescission was only remedy Common Law Courts  Relief for innocent misrepresentation only if it became a term of the contract   Tort of negligent misrepresentation Only remedy was damages

THE LAW OF COMMERCIAL CONTRACT

History

 1970’s – Statutory Reform  S52 Trade Practices Act & s11 Fair Trading Act  Removed distinction between fraudulent, negligent and innocent misrepresentation  Built upon previous law regarding misrepresentation

THE LAW OF COMMERCIAL CONTRACT

Causes of action for misrepresentation

Action for damages for

tort of deceit

(fraud) Action for damages for

tort of negligence

Action for

misleading or deceptive conduct

(breach of TPA s 52, Fair Trading Act or ASIC Act) Action for

breach of contract

common law misrepresentations statutory misrepresentations contract law

THE LAW OF COMMERCIAL CONTRACT

Categories of Misrepresentation

 Fraudulent misrepresentation  Representor knew it to be false or was reckless as to whether it was true or false

THE LAW OF COMMERCIAL CONTRACT Fraudulent misrepresentation (deceit) Step 1

A false representation of fact was made (beware promises, opinions or a mere puffery)

Step 2

The representation was intended to (and did) induce the representee to act ; (eg, by creating a contract)

Step 3

The false representation was fraudulent: the representor knew the statement was untrue, or was reckless as to its truth   Liability for fraud cannot be excluded Remedy for fraudulent misrepresentation is damages .

THE LAW OF COMMERCIAL CONTRACT

Categories of Misrepresentation

 Negligent Misrepresentation  Representor owed a duty of care to representee  Representor failed to exercise the required standard of care  Loss, which was a reasonably foreseeable consequence of the misrepresentation, was caused by misrepresentation

THE LAW OF COMMERCIAL CONTRACT Negligent misrepresentation Step 1

Did the representor owe a duty of care to the representee?

Step 2

Has the representor failed to exercise the required standard of care?

Step 3

Were the representee’s losses caused by the negligence and were the losses reasonably foreseeable?   Liability for negligence can be excluded by an exemption clause Remedy for negligence is damages.

THE LAW OF COMMERCIAL CONTRACT

Categories of Misrepresentation

 Innocent misrepresentation  Representor did not know it was false and owed no duty of care to the representee  No remedy at common law or equity

THE LAW OF COMMERCIAL CONTRACT

Categories of Misrepresentation

 Misleading & Deceptive Conduct  Section 52 Trade Practices Act  No need for fraud or negligence

THE LAW OF COMMERCIAL CONTRACT Misleading or deceptive conduct (statutory misrepresentation)

Is the representee covered by the TPA, ASIC Act and/or state legislation (eg FTA (Vic))?

Has the representee committed ‘misleading or deceptive conduct’and was this ‘in trade or commerce’? What remedies are appropriate under the relevant Act(s)?   Prominent and clear disclaimers may affect liability.

Remedies: 

Damages (if the misleading or deceptive conduct representation caused the loss);

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Contract created in reliance on the misleading conduct may be varied or declared void;

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Injunctions; Other remedies (eg corrective advertising); Criminal sanctions are available for misrepresentations under s 75AZC TPA.

THE LAW OF COMMERCIAL CONTRACT

Elements of Misrepresentation

   The statement was false The statement was one of fact Statement was addressed to the representee before or at the time that the contract was entered into  The statement induced the representee to enter into the contract

THE LAW OF COMMERCIAL CONTRACT

Statement was false

 Silence will not normally suffice  Half truths  Re Hoffman; ex p Worrell v Scilling (noted – S&OR p39\59)  Krakowski v Eurolynx (note - S&OR p40\60)  Altered circumstances  Lockhart v Osman (S&OR p40\60)  Misrepresentation can be made by conduct

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Statement was one of fact

   Not a mere puff Usually, not an opinion An opinion can be a fact where the representor has special knowledge  Smith v Land and House Property Corp (S&OR p39\59)  The existence of an opinion can be a fact  Sola Optical v Mills (1987) 168 CLR 628

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Addressed to the Representee

 A representee cannot sue on a representation that was not directed to him and was not intended to induce him into making the contract  Peek v Gurney (S&OR p41\61)  But is sufficient if communicated to a third party with the intention that it would be communicated to the representee

THE LAW OF COMMERCIAL CONTRACT

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Statement Induced Representee to Act

 Not necessary that it was the only reason for entering the contract But it must be one of the reasons Representee cannot be aware of truth before entering into the contract  Holmes v Jones (S&OR p40\60)  Representee is not required to investigate  Redgrave v Hurd (S&OR p41\61)

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Remedies for Misrepresentation

 Recission  Contract is void ab initio  Not the same as termination  Damages

THE LAW OF COMMERCIAL CONTRACT

Duress, Undue Influence, Unconscionable Conduct and Mistake

(Sweeney & O’Reilly 1 st 2 nd Ed Chapter 9 pp 219 – 224, Ed Chapter 9 pp 261 – 266)

THE LAW OF COMMERCIAL CONTRACT

Duress

 A contract entered into due to coercion or force can be rescinded  Coercion can be:  To the person;  To goods; or  Economic duress

THE LAW OF COMMERCIAL CONTRACT

Duress (cont.)

 Duress to the Person  Threats of physical punishment or imprisonment to the person, his family or friends  Duress to Goods  Threats that are made against a person’s property

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Economic duress

 An economic threat that is not “legitimate”  No rule that that commercial parties have to be fair to one another  A threat to break a contract can be economic duress  North Ocean Shipping v Hyundai (p220\262)  A lawful threat may be illegitimate  Cockerill v Westpac (S&OR p220\263)

THE LAW OF COMMERCIAL CONTRACT

Undue influence

 The unconscionable use by one person of power possessed by him over another in order to induce the weaker party to enter into a contract  Mitchell v Pacific Dawn (S&OR p263)  Presumed in special relationships and where one party is in a position of dominance or confidence  O’Sullivan v Management Agency (S&OR p221\264)  Lloyd’s Bank v Bundy (S&OR p222\265)

THE LAW OF COMMERCIAL CONTRACT Undue influence (cont.)

 There must be more than mere reliance or influence  Innocent party must show that the contract would not have been made without the undue influence  Court will look at:  The equality of the bargain  The weaker party’s ability to make free and independent choices  Whether the weaker party received independent advice

THE LAW OF COMMERCIAL CONTRACT

Unconscionable Conduct

 One party takes advantage of the other parties special disability to the extent that the contract is unfair or unconscionable   Blomley v Ryan (S&OR p219\261) Commercial Bank v Amadio (S&OR p61\86)  Elements    Special disability Absence of any equality between the parties Disability evident to other party

THE LAW OF COMMERCIAL CONTRACT

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Unconscionable Conduct - Remedies

Originally, only rescission was available s51AA Trade Practices Act and s7 Fair Trading Act permits damages  A corporation must not, in trade or commerce, engage in conduct that is unconscionable within the meaning of the unwritten law, from time to time, of the States and Territories.

S82 Trade Practices Act & s159 Fair Trading Act  A person who suffers loss or damage by conduct of another person … may recover the amount of the loss or damage by action against that other person or against any person involved in the contravention.

THE LAW OF COMMERCIAL CONTRACT

Mistake

 A party cannot get out of a contract because they made a mistake  Exceptions:  Mistake due to other party’s misrepresentation, unconscionable conduct etc.

 Common mistake  Unilateral mistake

THE LAW OF COMMERCIAL CONTRACT

Mistake

 Common mistake  Both parties make the same mistake  Unilateral Mistake  One party is mistaken as to a fact; and  Other party is aware of the mistake  Taylor v Johnson (S&O p223)

THE LAW OF COMMERCIAL CONTRACT

Recission

(Sweeney & O’Reilly 1 st 2 nd Ed Chapter 9 pp 216 Ed pp 257 - 261) – 219,

THE LAW OF COMMERCIAL CONTRACT

Rescission

 The parties must be capable of being restored to substantially the position they were in before the contract was entered into  Known as “Restitution”  Court can make consequential orders  Precise restitution is not necessary  Not possible where services already supplied pursuant to a contract of service

THE LAW OF COMMERCIAL CONTRACT

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Rescission is available for:

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Misrepresentation

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Unconscionable conduct Duress Undue influence

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Mistake

THE LAW OF COMMERCIAL CONTRACT

Rescission (cont.)

 Innocent party must give notice of rescission to other party  Notice can be implied from conduct  Academy of Health & Fitness v Power (S&OR p218\260)

THE LAW OF COMMERCIAL CONTRACT

Rescission (cont.)

 Rescission is not permitted if the contract has been affirmed  After discovering misrepresentation, innocent party does any act which indicates that he is treating contract as still running  A delay in rescinding can amount to an affirmation

THE LAW OF COMMERCIAL CONTRACT

Rescission (cont.)

 Not permitted if the legal rights of an innocent third party will be adversely affected  For example, where goods have been on sold to a bona fide purchaser for value  But, rescission will be effective where it occurs before the third party gains an interest  Car & Universal Finance Co v Caldwell (S&OR p218\260)