[Contract] Vitiating Factor 1, Misrepresentation

MISREPRESENTATION


1        TERMS AND REPRESENTATIONS


There are mere puffs, terms of the contract and representations.

1.1       Mere Puffs



Dimmock v Hallett

·       Statement too vague might be a mere puff
o   “fertile and improvable…can be over time considerably improved at a moderate cost”
·       False factual statement is a misrepresentation
o   “have been lent out to the tenant just recently” proved to be false

Carlill v Carbolic Smoke Ball

·       Not puffery if specific and assuring
o   D included a bank assurance not

Mitchell v Valherie

·       Plaintiff: “Nothing to Spend” represented that there were no serious faults
·       Court: No. A reasonable person would not understand the words to convey such image.
o   1. The nature was a pitchy promotion of the property
o   2. The phrase “Nothing to Spend- Perfect Presentation” has to be read as a whole.
o   3. The words used in circumstances were commonly used as hyperbole

1.2       Terms


Couchman v Hill

·       Although the written conditions protected the seller, the oral question and answer amounted to an oral offer of warranty
o   “Cows are unserved” but this was wrong; this constituted a warranty


Dick Bentley Productions v Harold Smith Motors

·       When a warranty is intended, would an intelligent bystander reasonably infer that a warranty was intended; as well as the words and behaviours and conduct of the parties
·       Representation intended as a warranty
o   Car only done “20,000 miles” when in fact figure was “100,000” – the statement constituted as a warranty because the representation was made for the very purpose of inducing the other party to act on it and since it actually induced him to act on it by entering the contract (prima facie ground for inferring representation was intended as a warranty


Ecay v Godfrey

·       A representation is not a term if the seller advised to confirm the statement
o   “Boat was sound” but warned the buyer to check

2        WHAT IS A REPRESENTATION



2.1       Representation made by conduct


Jones v Dumbrell

·       Representation made is taken to be continuing up to the moment when the contract is completed; i.e. it is as if the representation had been false when originally made
o   Shares sold to D on the basis that D would continue the business for family benefit only; shares sold undervalue; D later intends to resell shares for profit but not telling P

Gordon v Selico

·       The purchaser was misled by a cover up operation and this has been intended. The silence of the condition was a misrepresentation by conduct.


2.2       Representation made by silence/ false impressions


A person may say nothing but a false impression may be created by conduct. There is generally no duty of disclosure but here are exceptional situations where such duty arises:

1        Statement partially true
2        Insurance Contracts Act
3        Guarantees
4        Fiduciary relationship


2.2.1      Statement partially true


Dimmock v Hallett
·       Non-disclosure may imply falsely that there are no other facts that quality that statement
o   Statement that the land had been lent


Keates v The Earl of Cadogan

·       No duty to disclose knowledge that would be important to the purchaser
o   D knew that the house was dangerous to live in; but P could have made inspection; there was no stated warranty


Krakowski v Eurolynx Properties

·       A representation that the terms of the lease instrument were unaffected by any other contractual arrangement was implied from the failure to bring a separate agreement with the lessee to the purchaser’s attention
o   Similar to Dimmock v Hallett- non-disclosure may imply falsely that no other facts are material


With v O’Flanagan

·       Silence can constitute misrepresentation if representation becomes not true during the course of negotiation (changes in fact need to be disclosed)
o   Decrease in income had not been notified; this information was important to the transaction
o   Reason: One party has a clear opportunity to correct something that they are in a better position to know about.

Jones v Dumbrell

·       In a misrepresentation becomes false and the representor does not correct it by remaining silent, silence counts as misrepresentation. D would be liable for damages in deceit.


2.2.2      Insurance Contracts Act


With insurance contracts, there is automatically a duty to disclose. This is because a contract of insurance is classified as a contract uberrimae fidie (of utmost good faith). The duty is imposed in order to ensure that the parties enter the contract on a reasonably equal footing.

Insurance Contracts Act 1984 (Cth) s 21

The Insured Duty of Disclosure

(1)  Subject to this Act, an insured has a duty to disclose to the insurer, before the relevant contract of insurance is entered into, every matter that is known to the insured, being a matter that:
(a)  the insured knows to be a matter relevant to the decision of the insurer whether to accept the risk and, if so, on what terms; or
(b)  a reasonable person in the circumstances could be expected to know to be a matter so relevant.

(2)  The duty of disclosure does not require the disclosure of a matter:
(a)  that diminishes the risk;
(b)  that is of common knowledge;
(c)  that the insurer knows or in the ordinary course of the insurer's business as an insurer ought to know; or
(d)  as to which compliance with the duty of disclosure is waived by the insurer.

(3)  Where a person:
(a)  failed to answer; or
(b)  gave an obviously incomplete or irrelevant answer to;
a question included in a proposal form about a matter, the insurer shall be deemed to have waived compliance with the duty of disclosure in relation to the matter.

2.2.3      Guarantees


As a general rule, contracts of guarantee do not require full disclosure of all material facts but limited disclosure is imposed.

What is a contract of guarantee? It arises out of a three party situation. There is a creditor, debtor and guarantor. The contract is between two of the parties – the guarantor and the creditor. The guarantor promises the creditor to make good the defaults of the debtor and in retrun, the creditorconfers a benefit, such as an increase in credit or an extension of time to repay, on the debtor.




Westpac Banking Corporations v Robinson

·       Bank was under no duty to disclose to a prospective guarantor of a customer’s account that the account had been overdrawn
o   It is naturally to be expected that the bank is not satisfied with the customer’s credit and that was why it would have required a guarantee.

2.2.4      Fiduciary relationship


McKenzie v McDonald

·       In a fiduciary relationship (confidential relationship) duty to disclosure might arise and if that duty is not fulfilled, may amount to misrepresentation.
o   D acted as agent for the P; D knew of hardship; D took advantage of P; did not disclose information to P

 






3        ACTIONABLE MISREPRESENTATION


In order to be actionable, a misrepresentation must be

1        A misrepresentation of fact
2        The misrepresentation must be addressed to the misled party
3        It must be material (materiality)
4        It must actually induce the party (actual inducement)

3.1       A misrepresentation of fact


3.1.1      Statements of intention actionable


Statements of intention are not generally actionable. Every promise, whether contractual or pre-contractual, implies a representation of fact, namely that there is a present intention to fulfill the promise. If there is no such intention, a misrepresentation is established.

Edgington v Fitzmaurice

·       D promised that money would be used to complete alterations to the company’s buildings. D did not use the money for that purpose.
·       Court: It was a misrepresentation of fact since the directors had different intention to the one they stated.

Ritter v North Side Enterprises

·       Court: Applying Edgington held:
o   The person making the statement was representing their current state of mind and therefore was a statement of fact.

Balfour v Hollandia Ravensthorpe NL

·       Bray CJ: “If I say that a department store is selling certain goods at 15 per cent discount, that is a statement in the present tense and a representation of an existing fact; if I say “if you go to that store they will sell you the goods in question at a discount of 15 per cent, that is a statement in the future tense but it is nonetheless a representation of an existing fact. It means exactly the same as the first statement.”

3.1.2      Statements of opinion actionable


Statements of opinion are not generally actionable. Usually, a statement of opinion may be mere sales talk or it may be a statement of belief but it may involve or imply a statement of fact (actionable).


Bisset v Wilkinson

·       Plaintiff: statement that the land could support 200 sheep was misrepresentation.
·       Court: No misrepresentation.
·       Both parties knew that it had not been used as a sheep farm. There was no advantageous/expert knowledge by the seller Bisset. Both could draw their own conclusions. Therefore, Bisset gave mere opinion.
                                                                                                                 

Mitchell v Valherie

·       Plaintiff: “Nothing to Spend” represented that there were no serious faults
·       Court: No misrepresentation. A reasonable person would not understand the words to convey such image.
o   1. The nature was a pitchy promotion of the property
o   2. The phrase “Nothing to Spend- Perfect Presentation” has to be read as a whole.
o   3. The words used in circumstances were commonly used as hyperbole

Smith v Land & House Property

·       Issue: Whether there were grounds to justify the opinion that a tenant was “the most desirable tenant” when he was in arrears of rent.
·       Court: Yes, misrepresentation. No justifications existed.
o   A person making the opinion always implies that he or she in fact holds that opinion. This means that there are justifiable grounds. However, if those grounds are absent, it is a misrepresentation.

Pryor v Given

·       Plaintiff argued that D’s statement “wonderful place to live” was false and therefore misrepresentation.
·       Court: Yes, misrepresentation.
o   Despite its intention to be a mere puffery, it conveyed the impression that the land was zoned for urban use and therefore a statement of fact.
                             


3.1.3      Statements of law actionable


Statements of law are not actionable unless fraudulent. This is because a statement of law implies a representation of fact, i.e., that the person professing to expound the law believes it to be as stated.

Public Trustee v Taylor

·       Statement made that is knowingly false, made for the purpose of inducing prospective bidders entitles purchaser to compensation as well as the contract rescinded
·       Court: Yes, misrepresentation (fraudulent)

If statements of law are not fraudulent, they are not actionable. However, in England, it has been recognized that a misrepresentation of law is now actionable (Pankhania v London Borough of Hackney (2005))­. The position is Australia has been criticised in David Securities v Commonwealth Bank of Australia (1992).

David Securities v Commonwealth Bank of Australia

·       High Court: If mistake of law provides a basis for a restitutionary claim, a misrepresentation of law should equally provide a basis for rescission
·       Also, in reference to the doctrine of estoppel, it has been staed that the distinction between assumptions as to the law and as to fact “is artificial and elusive…So it would be productive only of confusion and arid technicality to restrict the operation of the doctrine so as to exclude from its scope an assumption as to purely legal state of affairs” (Commonwealth v Verwayen)

3.2       Addressed to misled party


Peek v Gurney

·       Representation is only actionable when representor intends that the third party pass the statement to the representee.
o   Would a reasonable person have been influenced by the statement?
o   In the case, P purchased shares upon the prospectus not sent from D to P.
o   No misrepresentation as there was no direct communication

3.3       Materiality

3.3.1      Negligent misrepresentation


Materiality is required in negligent misrepresentation.

Rationale is that the imposition of a duty of care in giving information requires that the reliance of the recipient be reasonable in all the circumstances (Tepko v Water Board).

Shaddock v Parramatta City Council

·       Gibbs CJ: “A person should be under no duty to take reasonable care that advice or information which he gives to another is correct, unless he knows, or ought to know that the other relies on him to take such reasonable care and may act in reliance on the advice or information which he is given, and unless it would be reasonable for that other person so to rely or act.

The issue is whether a reasonable person would be induced to enter the contract. If yes, then it follows that misrepresentation is material.

3.3.2      Fraudulent misrepresentation


Materiality is not required in fraudulent misrepresentation. 

Nicholas v Thompson

·       Facts: The representees were induced to purchase the representor’s interest in a speculative venture by the representor’s fraudulent misrepresentation that he had been offered a very large sum of money for his interest, but had refused to sell. The representor argued that the representation could not be regarded as material as it was not such as would induce a reasonable person, as distinct from the particular representees, to enter the contract.
·       Court: It did not matter whether or not the representation was material.
·       MacArthur J: “If the defendant makes the statement for the purpose of inducing and the plaintiff is thereby induced, that, I think is sufficient.”

3.4       Actual inducement


Did the representee actually rely on the misrepresentation?

1        If the representee was influenced by other factors as well as the representation, this will not defeat a claim (Gould v Vaggelas).
2        If the representee makes his or her own investigation and relies solely on the result of that investigation, the representee’s claim will be defeated (Holmes v Jones; Redgrave v Hurd).
3        If the representor intends to induce reliance by the representee, the courts draw an inference that the representee was in fact induced to rely on the representation (Gould v Vaggelas).


Gould v Vaggelas

·       Representation does not need to be the sole inducement; it is sufficient that it plays some part in contributing to the formation of the contract
·       See e.g. Edgington v Fitzmaurice
o   The misstatement relied upon although party is influenced by an erroneous supposition can still make D liable for misrepresentation.

Redgrave v Hurd

·       A statement made falsely about the firm’s turnover that was relied upon by the purchaser is still misrepresentation even if the seller gives them the opportunity to find out


Holmes v Jones

·       A representee unaware of the representation cannot be induced by it and therefore no misrepresentation
o   To recover damages for fraudulent misrepresentation inducing a contract, the plaintiff must prove that
§  Misrepresentation was fraudulent
§  Contract actually entered into was induced by it
§  Actual loss from entering into the contract
·       Representee made his own investigations and relied solely upon the results of that investigation rather than the representor’s false statement then the claim is defeated


4        TYPES OF ACTIONABLE MISREPRESENTATION (CULPABILITY)


4.1       Fraudulent


Derry v Peak

·       Fact: Company honestly believed that the party would be able to run the trams when in fact there had to be license (and license was rejected). Plaintiff argued that they had acted fraudulently.
·       The case provides the meaning of fraudulent misrepresentation
·       Deceit
o   The representor knows that the statement is false
o   The representor makes the statement without believing its true
o   The representor makes a statement recklessly/ carelessly without knowing where or not its true or false
·       To prevent a false statement being fraudulent, there must be honest belief in its truth.

Krakowski v Eurolynx

·       If ambiguous, whether the sense in which a representation would be understood by a reasonable person in the position of the representee is prima facie the sense relevant to the question whether the representation is false

4.2       Negligent


Hedley Byrne v Heller

·       Before, negligent misstatements were not actionable. But after this case, it became actionable; i.e. statements made honestly but not true can give rise to an action in tort of negligence.

Shaddock v Parramatta

·       Per Gibbs CJ: Duty extends to person who gives an advice or information on a serious occasion concerning a business or professional transaction.

Esanda Finance v Peat Marwick Hungerfords

·       Held: “mere foreseeability of the possibility that a statement made by A to B might be communicated to a class of which C is a member... is not sufficient to impose on A a duty of care owed to C in the making of the statement”
·       Common example: auditor’s report

4.3       Innocent (wholly)


A statement inducing a contract may be entirely innocent but this does not mean that no relief is available. The representee may be entitled to rescind the contract (court’s discretion).



5        RESCISSION FOR MISREPRESENTATION


Rescission sets a contract aside and restores the parties to their original pre-contractual positions.

5.1       Requirements



Ivanof v Phillip Levy; Car Financing v Caldwell

·       Election must take place
·       Within reasonable time
·       Communicated to the representor

5.2       Bars to rescission


An obvious hurdle is the impossibility of substantial restoration of the parties to their original positions. The bars to rescission include:

1        Affirmation
2        Lapse of time
3        Restitution impossible
4        Third party rights
5        Execution of contract

5.2.1      Affirmation


When a contract is voidable by reason for a vitiating factor (e.g. misrepresentation), the victim of the relevant misconduct must elect whether to avoid or affirm the contract.

Coastal Estates v Melevande

Adam J: “Because the making of an election necessarily presupposes a knowledge that a choice between alternative is open, in general, no question of affirmation can arise in the absence of such knowledge. There appears, however, to be one important qualification upon this. If a representee, after discovery of the facts which entitle him to avoid a contract, exercises, in an unequivocal manner, rights under the contract adversely to the other party, he will in general be deemed to have elected to affirm it, although not aware of his right to elect.”

Sholl J gives an example of a purchaser of land, who, knowing of misrepresentation, enters into possession of the property or accepts some other benefit from the vendor. This is an exercise of rights adversely to the other party.

5.2.2      Restitution impossible


Alati v Kruger

·       The plaintiff purchased a store and D made some misrepresentations about the store’s earning capacities. P sought rescission of the contract and restoration to original position
·       Issue: Events have transpired, making restitutio in integrum impossible
·       Held: However equity allows rescission as long as substantial restitution is possible. This is because equity has the powers to facilitate restitutio in integrum.

5.2.3      Execution of contract


Svanosio v McNamara

·       The case follows the rule in Wilde v Gibson.
·       The rule is that innocent misrepresentation will not suffice as a basis for rescinding such an executed contract. It needs to be fraudulent. Also, the rule relates to a contract for sale of land that is induced by a misrepresentation, and has been completed by a conveyance of the land.  
o   Rationale is that purchase has the fullest opportunity to investigate title and conduct surveys of the land so that the vendor’s representations can be tested.
·       The rule now apples to other types of contract, including sale of shares, a lease, sale of business etc.
In some cases, the rule is not followed (see e.g. Leason v Princes Farm where the case concerned a sale of horse.)







6        DAMAGES FOR MISREPRESENTATION


6.1       Damages for fraudulent misrepresentation


Toteff v Antonas (1952)

·       Held: Damages in the tort of deceit can be awarded for all of those losses that flow directly from the deceit. It is not that the damages need to be reasonably foreseeable – the test is broader: its losses that flow directly from the deceit.
·       Consequential damages are not recoverable for the tort of deceit

Gould v Vaggelas (1984)

·       Gibbs CJ: "It is well established that in an action of deceit where the plaintiff has been induced by the fraudulent misrepresentation of the defendant to enter into a contract of purchase, the measure of damages usually applicable is the difference between the real value of the property at the time of the purchase and what the plaintiff paid for it”

Professional Services of Australia v Computer Accounting & Tax (2009)

·       Held: The basis of the damages was that because we’d entered into a contract, as a result of the deceit, we miss out on alternative investment opportunities. Ie. An opportunity was lost.
·       Damages can be awarded on the basis that an opportunity was lost = the money that they would have made by investing elsewhere which they failed to make because of the deceitful contract, could be recovered.







6.2       Damages for negligent misstatement


Kenny & Good v MGICA (1992)

·       Facts: Real estate valuer contracted with a bank to value a residential property in order for the bank to determine whether it should provide mortgage finance to the owner
o   the bank instructed that the valuation could be relied on and so the insurers did rely onthe valuation. o the report stated that he property was “suitable security for investment ...”
o   the loan was secured and hte mortgage insurer provided insrance to the bank (in case the owners could not pay)
o   the true value of the property was less than the valuation and when the owner defaulted, the property was sold substantially lower than that of hte valuation as a result of the fall in the property market = the bank lost nearly $2million which was paid by the insurers.
o   o the insurers sued the valuer and the trial judge held that he valuation was negligent and hence, the bank valueer was liable for the whole of hte $2million loss. The valuer appeals and was unsuccessful:
·       Held: the amount that the bank could recover was the full amount paid under the insurance policy. Ie. Not simply the real difference between nthe real value and the negligent vvalue but it was all the money that the insurers had paid out.
o   Because the insurer would not have lent money had there been no negligent misstatement.

6.3       Damages for negligent misstatement that is also a term of the contract


See Alati v Kruger

7        EXCLUSION OF LIABILITY


It is possible to exclude liability for non-fraudulent misrepresentation (Commercial Banking v RH Brown).




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