Misrepresentation

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Misrepresentation is a false statement made by one party which induces another party to enter the contract, but is not a term of the contract. When a party has entered a contract because of a misrepresentation, it can seek relief. The requirements for a misrepresentation are as follows:

  1. The aggrieved party must prove it relied on the misrepresentation to enter into the contract.
  2. The misrepresentation must be statement of fact:
    • Statements of opinion usually involve statements of fact.[1]
    • Statements to future intention may involve statement of fact. [2]
    • Statements in law can also be used.[3]
  3. The representation must be positive. This means it must be a statement and not silence. Exceptions arise when there is a duty of disclosure, which arises when:[4]
    • Where a statement is technically true, but gives a false impression.
    • Where a statement is true initially but subsequent circumstances render it false (i.e., a duty to correct oneself).[5]
    • Where the party concealing information is in a better position to know the facts that the other party.
    • In certain types of contracts of 'utmost good faith' (uberrimae fidei), i.e.insurance or partnership contracts[6]
    • In special/fiduciary relationships.[7]

A party who has suffered from a misrepresentation would be obtain rescission of the contract or damages, according to the circumstances. Today, if the misrepresentation occurred in a business context, a plaintiff would prefer to argue it under Misleading or deceptive conduct so he may be compensated under the ACL (which offers more extensive damages). Misrepresentation can also serve as a defence.

This article is a topic within the subject Contracts.

Contents

Required Reading

Paterson, Robertson & Duke, Contract: Cases and Materials (Lawbook Co, 11th ed, 2009), pp. 803-812 [32.05-32.65].

Introduction

[8] An action is brought on the basis of misrepresentation when the false statement made did not amount to a term of the contract (promissory statements or a collateral promises) and thus no action can be brought for breach of contract.

  • Under the general law (both common law and equity), a party may be entitled to rescind the contract if it entered it due to a misrepresentation. In short, to rescind the contract means to set it aside from the beginning with the parties restored to their original positions before the entered the contract.
  • If a plaintiff establishes torts of negligence or deceit, he will be entitled to recover damages for the harm he suffered as a result of the misrepresentation.

Today, the relief for a Representee (the person to whom the misrepresentation was made) is governed less by the general law and more by statute - the Australian Consumer Law[9] (termed as misleading or deceptive conduct). However, the general law is still important because:

  • It is the only source of relief for a Representee who was induced to enter into a contract outside a commercial or consumer context (thus not governed by the legislation).
  • The interpretation of the legislation is influenced by concepts formulated in the general law.
  • General law misrepresentation is still often relied upon by plaintiffs as an alternative to misleading or deceptive conduct.

Establishing a misrepresentation

In the case of an ambiguous representation, the court will determine the meaning of the representation using an objective approach.[10] In addition, it is required that a misrepresentation will be:

  1. A statement of an existing or past fact.
  2. A positive misrepresentation.
  3. A reliance on the misrepresentation.

Statement of fact

[11] In order to obtain relief for a misrepresentation, the representation made must be a statement of existing or past fact. Such a statement may be written, oral or implied.

Generally, no relief is available for other types of statements, such as mere puffs, statements of opinion, statements as to future intentions or statements of law. However, the courts sometimes find an implied statement of fact within such representations.

Statements of opinion

The possibility of a statement of opinion also implying a statement of fact is demonstrated in Smith v Land & House Property Corp[12]:

  • The plaintiff advertised a hotel for sale, writing that the hotel was rented to a 'most desirable tenant' at the moment. The defendant agreed to buy the hotel and then it was discovered that the tenant was bankrupt. The defendant refused to pay and the plaintiff sued for specific performance whilst the defendant sued for misrepresentation.
  • The court ruled that a statement of opinion can often involve a statement of fact.
  • "[I]f the facts are not equally known to both sides, then a statement of opinion by one who knows the facts best involves very often a statement of a material fact, for he impliedly states that he knows facts which justify his opinions."[13]
  • "[I]f the landlord says that he considers that the relations between himself and his tenant are satisfactory, he reals avers that the facts peculiarly within his knowledge are such as to render that opinion reasonable."[14]
  • "[such a statement of opinion] amounts at least to an assertion that nothing has occurred in the relations between the landlords and the tenant which can be considered to make the tenant an unsatisfactory one. That is an assertion of a specific fact."[15]
  • The contract was rescinded.

And also in Fitzpatrick v Michel[16]:

  • The Plaintiffs entered a contract to lease flats off the Defendant. The Defendant made a representation that the flats would be able bring in 6 guineas a week (if sub-let), but that turned out to be false. They brought an action for misrepresentation.
  • "[I] doubt whether any statement that something will happen in the future can in the same sense be a statement of fact. A man of course may bind himself by a warranty that it will happen, but, leaving warranty out of the question, the statement can be no more than an expression of opinion or belief."[17]
  • However "it does involve certainly a representation that the person making it entertains that opinion, and possibly a representation that facts are known to him that justify that opinion."[18]
  • Note that the fact a defendant honestly thought something was true does not protect him from breach of a term, however it does protect him from a misrepresentation.
    • "Honesty of belief in the truth of a warranty is no defence to a breach of warranty, whereas it is a complete defence to a charge of false representation. If a statement is an honest expression of opinion, honestly entertained, it cannot be said that it involves a fraudulent misrepresentation of fact."[19]

Statements as to future intentions

Statements as to future opinions are discussed in Eddington v Fitzmaurice[20]:

  • "the state of a man's mind is as much a fact as the state of his digestion."[21]
  • It is true that it is very difficult to prove what the state of a man’s mind at a particular time is, but if it can be ascertained it is as much a fact as anything else.
  • A misrepresentation as to the state of a man’s mind is therefore a misstatement of fact.

And Beach Petroleum NL v Johnson[22]

  • "The fact that a party is prepared to, and does, enter into the transaction in question amounts to an implied representation that the party has a present intention to carry out the promises made."[23]
  • "Thus for a person to purchase goods on credit when at the time that person has no intention of paying for the goods amounts to deceit."[24]

Statements in law

In Public Trustee v Taylor[25], the court ruled that misrepresentations of law will entitle the Representee to relief:

  • "The same rights and consequences should flow from the making of fraudulent misrepresentation of law by which a party was induced to enter into a contract and from the making of a fraudulent misrepresentation of fact."[26]
  • This is because a statement of law necessarily implies a representation that the Representor knows that law is such and such, which is a statement of fact.

The distinction between statements of law and statements of fact is probably abolished now in Australia, since the same distinction was abolished in other contexts such as estoppel (Waltons Stores (Interstate) Ltd v Maher) and restitution (David Securities Pty Ltd v Commonwealth Bank of Australia[27]).

Positive misrepresentation

[28] Generally, relief will only be obtainable when a representation was said and proved to be false - that is, no relief will be obtainable for the failure to disclose something. Of course, there are a great many exceptions to this rule, where a duty of disclosure may arise. For example:

  • Where a statement is technically true, but gives a false impression.
  • Where a statement is true initially but subsequent circumstances render it false (i.e., a duty to correct oneself).[29]
  • Where the party concealing information is in a better position to know the facts that the other party.
  • In certain types of contracts of 'utmost good faith' (uberrimae fidei), i.e.insurance or partnership contracts[30]
  • In special/fiduciary relationships.[31]

In addition, non-disclosure may sometimes constitute misleading or deceptive conduct.

The concept of non-disclosure is discussed in Davies v London & Provincial Marine Insurance Co[32]:

  • A person was going to be arrested by the Defendant. The Plaintiff had meetings to discuss how he could stop the arrest of his friend, but meanwhile the Defendant realised he doesn't have ground to arrest the person. He continued discussions anyway and reached an agreement where the Plaintiff pays him money to not arrest the Defendant (who cannot be arrested anyway).
  • "if a statement has been made which is true at the time, but which during the course of the negotiations becomes untrue, then the person who knows that it has become untrue is under an obligation to disclose to the other the change of circumstances."[33]
  • In this case, the changing situation should have been disclosed. Relief is available to the Plaintiff on the basis of misrepresentation - the contract is rescinded and he does not have to pay.

An example of how a special relationship arises is demonstrated in McKenzie v McDonald:

  • "He assumed the function of advising and assisting a woman in a difficult situation in the acquisition of a residence by means of the disposal or pledging of her property.He was necessarily furnished with an intimate knowledge of her financial position, her obligations, and family needs. He proceeded to advise her upon the wisdom and practicability of raising money by mortgage, and acted for her in an effort to do so. He undertook the sale of her farm, and acquired such information as he could in relation to it, and offered his counsel as to its condition and the price she had asked and in effect should ask. In this circumstance he was, in my opinion, an agent who came within 'the rule of the Court."[34]

By contrast, contracts of guarantee do not require full disclosure. The only disclosure required (non-disclosure of which would amount to a misrepresentation) would be "those circumstances which were not naturally to be expected."[35]

Reliance by the Representee

[36] In order to obtain relief, the Representee must demonstrate that relied on the misrepresentation in entering the contract (a causal link).

References

Casebook refers to Paterson, Robertson & Duke, Contract: Cases and Materials (Lawbook Co, 11th ed, 2009).

Textbook refers to Paterson, Robertson & Duke, Principles of Contract Law (Lawbook Co, 3rd ed, 2009).

ACL refers to the Australian Consumer Law.

  1. Smith v Land & House Property Corp(1884) 28 Ch D 7
  2. Eddington v Fitzmaurice (1885) 29 Ch D 459; Beach Petroleum NL v Johnson (1993) 115 ALR 411
  3. Public Trustee v Taylor [1978] VR 289. Probably now treated as statements of fact due to Waltons Stores (Interstate) Ltd v Maher.
  4. Davies v London & Provincial Marine Insurance Co (1878) 8 Ch D 469, 475
  5. Davies v London & Provincial Marine Insurance Co (1878) 8 Ch D 469, 475
  6. Davies v London & Provincial Marine Insurance Co (1878) 8 Ch D 469, 475
  7. Hospital Products Ltd v United States Surgical Corp (1984) 156 CLR 41, 68 (Gibbs J);Davies v London & Provincial Marine Insurance Co (1878) 8 Ch D 469, 474
  8. Textbook, p. 475-6 [32.05]; Casebook, p. 803 [32.05]
  9. Part of the Competition and Consumer Act 2010 (Cth) and applies throughout all Australian jurisdictions.
  10. Krakowski v Eurolynx Properties Pty Ltd (1995) 183 CLR 563, 576-7
  11. Casebook, p. 804 [32.10]
  12. (1884) 28 Ch D 7
  13. (1884) 28 Ch D 7, 15
  14. (1884) 28 Ch D 7, 15
  15. (1884) 28 Ch D 7, 15
  16. (1928) 28 SR (NSW) 285
  17. (1928) 28 SR (NSW) 285, 289
  18. (1928) 28 SR (NSW) 285, 289
  19. (1928) 28 SR (NSW) 285, 289
  20. (1885) 29 Ch D 459
  21. (1885) 29 Ch D 459, 482-3
  22. (1993) 115 ALR 411
  23. (1993) 115 ALR 411, 583
  24. (1993) 115 ALR 411, 583
  25. [1978] VR 289
  26. [1978] VR 289, 299
  27. (1992) 175 CLR 353
  28. Casebook, p. 808 [32.40]
  29. Davies v London & Provincial Marine Insurance Co (1878) 8 Ch D 469, 475
  30. Davies v London & Provincial Marine Insurance Co (1878) 8 Ch D 469, 475
  31. Hospital Products Ltd v United States Surgical Corp (1984) 156 CLR 41, 68 (Gibbs J);Davies v London & Provincial Marine Insurance Co (1878) 8 Ch D 469, 474
  32. (1878) 8 Ch D 469
  33. (1878) 8 Ch D 469, 475
  34. [1927] VLR 134, 145
  35. Westpac Banking Corporation v Robinson (1993) 30 NSWLR 668
  36. Casebook, 812 [32.65]
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