#7422 - Misrepresentation And Rescission - Contract Law

Week 10- Misrepresentation and Rescission

Misrepresentation

Contemporary relevance:

• A misrepresentation is a false statement made expressly or impliedly by one party to another that acts as an inducement to the latter to enter into a contract with the former.

• To get relief you must show that you were misled by and relied on a positive misrepresentation of fact by the representor. They can get:

  • Recession or

    • Principal remedy. Contract is set aside ab initio (from the beginning). The parties are restored to their status before the contract unless it is impossible.

  • Damages

    • Only if a tort is established. Deceit or negligence. They require proof of culpability in the making of the false statement. They need reliance and actual damage.

• Now there are laws in the Trade Practices Act 1974 that prohibit misleading or deceptive conduct by trade or commerce.

Positive misrepresentation of fact:

• There is a rule that the representation must be a statement of existing or past fact. It excludes mere puffs, statements of opinion or future intent or representations of law.

• You can’t rely on all statements. If a statement is ambiguous you have to find out what it means before saying it is false.

• A statement of opinion may be mere sales talk or a statement of belief. It is extravagant and colourful language that no reasonable person would take literally. Or they have no personal knowledge of facts upon which the belief is based.

• A statement as to the future is a promise that something will happen in the future.

• A statement of law is when someone misstates the law. A fraudulent misrepresentation of law will have relief.

• There is no duty imposed on a contracting party to disclose material facts prior to the contract. Silence is not a basis for relief. The caveat emptor rule applies. However there are instances where a failure to speak does create a false impression and there is a duty to disclose by virtue of the relationship:

  • False impressions: Created by conduct. E.g. signing a cheque shows that you can pay.

  • If they tell only a half truth then the statement may imply there are no other facts. This is a false impression.

  • They have a duty to disclose the truth if their statement becomes false by latter events or they later discover what they said was false.

Contracts for insurance:

• A contract of insurance creates a duty to disclose all material facts known to them. Only material facts are needed. This is in the Insurance Contracts Act 1984 (Cth).

Contracts of guarantee:

• A limited duty of disclosure.

Fiduciary relationships:

• Gives rise to a duty of disclosure. A fiduciary is a person who undertakes to act in the interests of another and not their own interests.

Contracts for the sale of land:

• No duty for the vendor or purchaser to disclose. It is up to the purchaser to discover the truth.

Duty of care:

• There may be an obligation of disclosure.

Culpability:

• A misrepresentation can be culpable or innocent. It is fraudulent or negligent. The presence of culpability tells you whether a tort has been committed.

• Fraud means knowledge of the falsity. It is part of deceit. They are not guilty of deceit if they believed what they said was true. If it is ambiguous we look at it from the perspective of a reasonable person.

• A negligent misrepresentation is decided using Donoghue v Stevenson.

• Innocent misrepresentations mean there is no claim in tort for damages. The other person may be able to rescind the contract.

Reliance by the representee:

• A representee must establish a causal and not too remote link between the misrepresentation and their entry into the contract. They must show reliance.

• Did the representee actually rely on the misrepresentation? Most people are influenced by many factors and this won’t defeat a claim. Yet if they investigate themselves then they did not rely on the misrepresentation.

• If the representor intended for them to act on the representation and they do act then it doesn’t matter what a reasonable person would have done. Yet it is easier to prove if a reasonable person would have relied on it.

• There must be reliance on the misrepresentation. If it was made to a class of persons then all of them are representee.

• People are not always accurate in their sales talk. The courts will uphold bargains and expect people to exercise caution. They should get warranties. Rescission for an honest misrepresentation is only available in the common law when there is lack of consideration.

• Courts of equity can go further. Rescission for fraud is prima facie justified in cases where there was an honest misrepresentation that induced another to make a contract. There must be a representation of the state of affairs as an existing fact. This is because it is unfair not to allow a person out of a contract when the other party was at fault by making the untrue statement.

• A representation can be either a misrepresentation of fact or promissory.

  • A misrepresentation of fact can be fraudulent, allowing the party to rescind or affirm and get damages for any actual loss they suffer but they must have had an honest belief that the statement was true at the time it was made.

  • It might be a negligent misrepresentation of fact. The party can rescind or affirm. They can get damages in tort if they can show that there was a special relationship between him and the other party.

  • An innocent representation allows them only to rescind or affirm.

  • If it was a promissory statement: It may be a collateral contract or a term of the contract (a condition allowing the party to terminate or affirm or recover damages for breach, a mere warranty allowing damages for breach or an intermediate term allowing damages for breach and maybe to terminate the contract for the future).

• Whether there was a positive misrepresentation of fact:

  • Distinguish between whether a reasonable person would see the statement of fact as one which should be known to the speaker (Oscar Chess v Williams).

  • Or are what a reasonable person would see as the speaker’s opinion (Fitzpatrick v Michel). An opinion is not in itself a grounds for complaint. A statement of opinion made to someone who is much more ignorant of the circumstances that the speaker my amount to an implied representation of fact which if incorrect is grounds for rescission (Smith v Land and House).

  • Representations of law do not permit rescission.

• Can non disclosure amount to misrepresentation?

  • Contracts Uberrimae fidei: In negotiations for a contract of insurance, the insured has a common law duty to disclose material facts.

  • Where the contracting parties have a fiduciary relationship. They have a positive duty to disclose material facts (McKenzie v McDonald)

• Reliance by the representee:

  • Materiality of representation: if it is shown that a representation was intended to be acted upon and has been acted upon (a reasonable person would have acted on it) then there is misrepresentation.

• Nature of rescission: In Alati v Kruger they must make substantial restitution in equity to have the right to rescind. He will get relief if when he serves his notice the other party refuses to allow him to rescind or he needs an order from the court.

• Equity will not allow innocent third parties to be prejudiced by rescission, cannot rescind if they have acted unconscionably or if the representee has affirmed the contract in a genuine election (unequivocal words or conduct or conduct that has made the other party act to his detriment in reliance of this conduct so he is estopped from arguing that he did not affirm). There must not be a delay in exercising the right to rescind for innocent misrepresentation. An exclusion clause might remove the right to rescind

• Section 52 of the TPA 1974 prohibits misleading or deceptive conduct by corporations in trade or commerce. Remedies are injunction (s. 80), damages (s. 82) or orders to set the contract aside (s.87)

Rescission:

Nature and method:

• A form of relief which is available to victims of mistake, misrepresentation, duress, undue influence, unconscionable dealing, breach of fiduciary duty. You don’t have to have suffered loss.

• You set aside the contract and restore the parties to their pre-contractual positions.

• A contract vulnerable to rescission is voidable. It is valid until it is avoided, rescinded or disaffirmed. You elect.

• It is different from termination because it is set aside from the beginning and there can be no claim for damages for breach of contract because there is no contract.

• Rescission is through the act of the party but the effectiveness of it depends on the ability of either party or the court to make the necessary restoration. It is decided at the time of the court’s order and not when they give notice.

• To rescind you communicate your intention to the other party maybe in a writ claiming relief. Notice is not always required.

• The common law only recognises rescission if precise restoration is possible. Equity recognises it only for fraud and duress even if precise restoration is not possible. Equity can award indemnity- it allows damages for innocent misrepresentation unlike common law.

• Partial rescission is allowed in equity to ensure practical justice.

Bars to rescission:

• Affirmation. When a contract is voidable the victim must elect whether to avoid or affirm the contract. Words and conduct must be unequivocal in the sense that they are consistent with only the exercise of one of two of the sets of rights. It is irrevocable once made. They can say that after the misrepresentation, they elected not to avoid the contract. You don’t...