LECTURE 10 MISREPRESENTATION

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1 LECTURE 10 RESTITUTION Remedies in the law of restitution will be available in some cases in relation to breaches of contract. In Lecture 7 we discussed the role of restitution in relation to the recovery of benefits conferred upon a defendant (usually the payment of money) by the plaintiff in carrying out his or her contractual promise. Another situation is the recovery of compensation pursuant to a quantum meruit claim a claim for a reasonable sum of money for the value of goods and services provided to a defendant by the plaintiff. See Pavey & Mathews Pty Ltd v Paul (1987) 162 CLR 221; British Steel Corporation v Cleveland Bridge & Engineering Co Ltd [1984] 1 All ER 504; Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988) 165 CLR 107 (judgment of Gaudron J). MISREPRESENTATION Misrepresentations give rise to certain remedies that may be available to the innocent party. The primary remedy is rescission, which will be discussed below. However, rescission may not be available for various reasons. Other remedies may be available depending upon the type of misrepresentation involved. In examining the topic of misrepresentation we will, first, explore the requirements that need to be established before a non-contractual representation to be classified as a misrepresentation, and second, we will look at the various remedies that are available if a misrepresentation is established. ELEMENTS OF MISREPRESENTATION The Representation must be a statement of fact The representation must be a statement of a past or present fact. However, the distinction between fact and law is questioned. See Andre & Cie v Ets Michel Blanc & Fils [1979] 2 Lloyd s LR 427 at 430; David Securities Pty Ltd v Commonwealth Bank of Australia (1992) 175 CLR 353; Clasic International Pty Ltd v Lagos (2002) 60 NSWLR 241 at If the traditional rule about statements of law still applies, it must be noted that there are qualifications. See Public Trustee v Taylor [1978] VR 289; Eaglesfield v Marquis of Londonderry (1876) 4 Ch D 693 at 702. Advertising puffery cannot amount to misrepresentation. See Mitchell v Valherie [2005] SASC 350. Promises or assurances as to the future are not statements of fact for the purposes of misrepresentation: Civil Service Co-operative Society of Victoria Ltd v Blyth (1914) 17 CLR 601. But see Balfour & Clark v Hollandia Ravensthorpe NL (1978) 18 SASR 240 A similar line of reasoning applies to mis-statements of future intention. See Beattie v Lord Ebury (1872) LR 7 Ch App 777 at 804. However, a statement of future intention will be a statement of a presently existing fact, if there is no previous intention to do that which the

2 2 representor states is his or her future intention: Edgington v Fitzmaurice (1885) 29 Ch D 459. Finally, statements of opinion are not generally regarded as statements of fact: Bisset v Wilkinson [1927] AC 177. But see Smith v Land & House Property Corporation (1885) 28 ChD 7; Magill v Magill [2005] VSCA 51. The representation must be false The falsity of a statement generally requires some positive statement or conduct by the representor. See Walters v Morgan (1861) 45 ER 1056 at There is no general obligation on a person to disclose facts. The rationale for this rule is the principle of caveat emptor (let the buyer beware). However, there are some cases where there is a positive duty to disclose facts that are known. First, contracts uberrimae fidei (contracts of utmost good faith) impose duties of disclosure of material facts. See Khoury v GIO (1984) 165 CLR 622; Insurance Contracts Act 1984 (Cth). Secondly, if a statement is only partially true or a distortion of the truth, the failure to disclose the whole truth amounts to a misrepresentation: Dimmock v Hallett (1866) LR 2 Ch App 21; Demagogue Pty Ltd v Ramensky (1992) 39 FCR 31. Thirdly, if a statement is made which is true at the time it is made but, because of changed circumstances, becomes untrue, the representor has an obligation to disclose the changed circumstances because the time at which a representation is to be evaluated is when the representee enters into the contract. See With v O Flanagan [1936] 1 Ch 575; Lockhart v Osman [1981] VR 57. The Representation must have been intended to induce and did induce the innocent party to enter into the contract In order for a false statement of fact to be an actionable misrepresentation it must have been intended to induce, and did induce, the representee to enter into the contract. See Smith v Chadwick (1884) 9 App Cas 187; Australian Steel & Mining Corp Pty Ltd v Corben [1974] 2 NSWLR 702; Peek v Gurney (1873) LR 6 HL 377; A-G of New South Wales v Peters (1924) 34 CLR 146; Smith v Kay (1859) 11 ER 299; Gould v Vaggelas (1984) 157 CLR 215 at 236; Gipps v Gipps [1978] 1 NSWLR 454; Holmes v Jones (1907) 4 CLR 1692; Senanayake v Cheng [1966] AC 63; Redgrave v Hurd (1881) 20 Ch D 1. Finally, for reliance to be established, it need not be shown that the statement was the sole inducing factor : Edgington v Fitzmaurice, at 481; Gould v Vaggelas, at 236. In Henville v Walker (2001) ALR 37 at 62; Timms v Commonwealth Bank of Australia [2002] NSWCA 298 at [102]. THE ISSUE OF MATERIALITY At issue here is whether the element of materiality is a further requirement to establish a misrepresentation. See Nicholas v Thompson [1924] VLR 554 at

3 3 REMEDIES FOR MISREPRESENTATION RESCISSION Rescission is the right to set aside a contract. The purpose of rescission is to put the parties back into the position they were in before the contract was entered into, referred to by the Latin phrase as restitutio in integrum: Abram Steamship Co Ltd v Westville Shipping Co Ltd [1923] AC 773 at 781. Once a contract is rescinded it is treated both at law and in equity as non-existing : Newbigging v Adam (1886) 34 ChD 582 at 592. Until the contract is rescinded it remains valid. It is not void ab initio. It is voidable. In order to rescind an innocent party must, as a general rule, clearly and unequivocally communicate his or her election to rescind to the other party: Immer (No 145) Pty Ltd v Uniting Church in Australia Property Trust (NSW) (1993) 182 CLR 26 at But see Car & Universal Finance Co Ltd v Caldwell [1965] 1 QB 525. THE MEANING OF RESTITUTIO IN INTEGRUM The purpose of rescission is to bring about restitutio in integrum. If this cannot be achieved a contract cannot be rescinded. Therefore, the practical meaning of restitutio in integrum must be properly understood. See Alati v Kruger (1955) 94 CLR 216 at 223-4; Balfour & Clark v Hollandia Ravensthorpe; Brown v Smitt (1924) 34 CLR 160; Spence v Crawford [1939] 3 All ER 271 at 288. THE NATURE OF THE REMEDY OF RESCISSION The nature of the remedy of rescission raises the issue of whether rescission is the act of the party that has a right to rescission or whether it is an order of the court in the same sense that damages at common law or specific performance are orders of the court. The state of the law on this issue is unclear. The significance of the issue lies in ascertaining the date a contract is rescinded. If rescission is the act of the party, rescission takes place when the party seeking to rescind gives notice of rescission to the other party. If rescission is an order of the court, rescission takes place when the court order is made. See Alati v Kruger, at 225; Kramer v McMahon [1970] 1 NSWLR 195 at 206; Maguire v Makaronis (1997) 188 CLR 449. A more controversial issue is whether the court can order a partial rescission. See Vadasz v Pioneer Concrete (SA) Pty Ltd (1995) 184 CLR 102; Maguire v Makaronis, at 472. LIMITATIONS ON THE RIGHT TO RESCIND Affirmation Given that an innocent party has a right to rescind, he or she can elect not to do so. The principle of affirmation states that, if there has been an election to affirm the contract, the right to rescind is lost: Coastal Estates Pty Ltd v Melevende [1965] VR 433 at

4 Before any words or conduct can amount to affirmation, the innocent party must be shown to have been aware of the circumstances that gave rise to the right to rescind. Whether he or she must also have been aware of the right to rescind because of these circumstances is a matter of some dispute. See Coastal Estates v Melevende; Re Hoffman; Ex parte Worrell v Schilling (1989) 85 ALR 145; Sargent v ASL Developments Ltd (1974) 131 CLR 634 at 645, 658; Khoury v Government Insurance Office of NSW (1984) 165 CLR 622 at 633-4; Peyman v Lanjani [1985] Ch 457. Rights of Third Persons If property has passed between the parties pursuant to a voidable contract and a third person, in good faith and for consideration, subsequently obtains an interest in such property, then the contract cannot be rescinded. Lapse of Time The lapse of time of itself will not usually deprive the innocent party of his or her right to rescind. It will, however, be a relevant factor in relation to whether he or she has affirmed the contract and thereby lost the right to rescind. Thus, a failure to rescind within a reasonable time will amount to an election to affirm the contract. However, lapse of time of itself will occasionally prevent rescission. See Leaf v International Galleries [1950] 2 KB 86. The Rule in Seddon's Case Derived from the decision in Seddon v North Eastern Salt Co [1905] 1 Ch 326, this rule, in its modern variation, stipulates that in a contract for the sale of land, if the contract has been executed, that is, if it has proceeded to settlement or completion, the right to rescind for an innocent misrepresentation is lost. See also Vimig Pty Ltd v Contract Tooling Pty Ltd (1986) 9 NSWLR 731; Grogan v 'The Astor' Ltd (1925) 25 SR (NSW) 409; Leason Pty Ltd v Princes Farm Pty Ltd [1983] 2 NSWLR 381; Sale of Goods Act 1923 (NSW), s 4(2A)(b). Exclusion Clauses A contract may contain a term to the effect that pre-contractual statements cannot be relied upon by the parties to the contract. Such terms can have the effect of precluding a right of rescission for non-fraudulent misrepresentation: Life Insurance Co of Australia Ltd v Phillips (1925) 36 CLR 60 at 82, 87. See also Byers v Dorotea Pty Ltd (1986) 69 ALR 715 at 725. DAMAGES IN TORT 4 As we have just seen, rescission will not always be available to the representee. In such cases various alternative remedies may exist. If the misrepresentation is fraudulent the remedy of damages in the tort of deceit is available. If the misrepresentation is made negligently, the remedy of damages in the tort of negligence is available. However, if the misrepresentation is neither fraudulent nor negligent, there is no available remedy in tort law. In cases of such 4

5 5 innocent misrepresentations there will, however, be statutory remedies pursuant to legislation dealing with misleading or deceptive conduct (see Lecture 11). DECEIT To establish a case in deceit the representee needs to establish that the misrepresentation is also fraudulent. See Derry v Peek (1889) 14 App Cas 337; Krakowski v Eurolynx Properties Ltd ( ) 183 CLR 563 at 578. NEGLIGENCE The tort of negligence properly connotes the complex concept of duty, breach, and damage thereby suffered by the person to whom the duty was owing : Lochgelly Iron & Coal Co v M Mullan [1934] AC 1 at 25. Thus, in an action in negligence the plaintiff needs to establish the following: (a) the existence of a duty of care owed by the defendant to the plaintiff; (b) a breach of the duty of care by the defendant; and (c) loss or damages suffered by the plaintiff that was caused by the defendant s breach of duty. The most difficult issue in negligence is the question of whether there exists a duty of care. See Donoghue v Stevenson [1932] AC 562; Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465 L Shaddock & Associates Pty Ltd v The Council of the City of Parramatta City (1981) 150 CLR 225 at 250; Esso Petroleum Co Ltd v Mardon [1976] QB 801; Parramatta City Council v Lutz (1988) 12 NSWLR 293 at