6.2 Misrepresentation

Misrepresentations have already been discussed above, both in the context of the ACL (see Chapter 4.1), and in the context of the tort of passing off (see Chapter 5). Further, while not discussed here, misrepresentations are regulated through the Civil Law (Wrongs) Act 2002 (ACT) and the Misrepresentations Act 1972 (SA). However, misrepresentations are also regulated by common law and equity, which is the context in which misrepresentations are discussed below.

Where a party to a contract makes a representation during the negotiations of the contract, and that representation, either expressly or impliedly, forms part of a contract, it may be treated as a breach of contract where the representation turns out to be untrue. A discussion of how such breaches are dealt with falls outside the scope of this book. However, regardless of whether such an untrue representation forms part of the contract, it may also constitute a misrepresentation.

The law identifies three different forms of misrepresentation:  fraudulent misrepresentation, innocent misrepresentation, and negligent misrepresentation. While all three share certain characteristics, negligent misrepresentation is different to such a degree that it is best discussed separately.

6.2.1 Elements shared by fraudulent misrepresentation and innocent misrepresentation

It is commonly recognised that, for there to be a fraudulent misrepresentation or an innocent misrepresentation the following four elements must be present:

1. A representation of fact or law;
2. Which is untrue;
3. Which was intended for the other party to rely upon (induce the contract); and
4. Which was in fact relied upon by the other party.

In addition, it seems beyond intelligent dispute that the misrepresentation must have been made by, or directly on behalf of, the contracting party seeking to induce the contract. Without this limitation, the other contracting party (party B) could be allowed to rescind a contract based on a misrepresentation made by a third party over whom the contracting party (party A) had no control – an obviously unjust situation.

6.2.1.1 A representation of fact or law

The first element, ‘a representation of fact or law’, could suitably be divided into two sub-elements: (1) has a representation been made, and (2) was that representation of fact/law? In the context in which it is discussed here, the term “representation” is given a very specific meaning by the law. A representation is a statement of fact or law, constituting an inducement to make a contract. While most commonly expressed either verbally or in writing, the manner in which it is expressed is irrelevant. Further, it may, but need not, be a term of a contract. Whether or not a representation has been made is a matter for the alleging party to prove. In this context, a few words must be said about how silence is dealt with.

Except for in four specific circumstances, silence does not constitute a misrepresentation. Those four circumstances are:

1. Where the parties are in a fiduciary relationship;
2. Where the contract is one requiring utmost good faith (uberrimae fidei);
3. Where silence would distort a positive representation; and
4. Where a statement was true, or thought to be true, at the time it was made, but subsequently becomes, or turns out to be, untrue.

The first two exceptions involve a duty to disclose. The application of the first exception was illustrated in Lowther v Lord Lowther.^[1] The matter before the Court involved the plaintiff instructing an art dealer to sell a painting belonging to the plaintiff. The art dealer was aware that the painting was worth considerably more than what the plaintiff was asking for and bought the painting at the low price. The plaintiff subsequently discovered the true value and sued to rescind the contract. The Court held that the art dealer, acting as an agent for a plaintiff, could not himself purchase the painting in question without having given the seller “the benefit of all the information possessed by the agent”.^[2] In other words, the art dealer (i.e., the agent) was required to inform the plaintiff (i.e., the principal) of the true value, before he could offer to purchase the painting. Consequently, the art dealer’s silence constituted a misrepresentation.

The second exception refers to contracts requiring utmost good faith. London General Omnibus Co v Holloway^[3] involved a contract of surety, and the Court noted that in certain peculiar types of contracts, such as insurance contracts, the law implies a condition that all material facts shall be disclosed. The reasoning behind this approach is clear when one considers the following:

The person seeking to insure may fairly be presumed to know all the circumstances which materially affect the risk, and, generally, is, as to some of them,; the only person who has the knowledge; the underwriter, whom he asks to take the risk, cannot, as a rule, know, and but rarely has either the time or the opportunity to learn by inquiry, circumstances which are, or may be, most material to the formation of his judgment as to the acceptance or rejection of the risk, and as to the premium which he ought to require.^[4]

In other words, the distribution of knowledge between the parties may be said to necessitate utmost good faith.

Krakowski v Eurolynx Properties Ltd^[5] illustrates the application of the third exception.  The appellants had bought a shop premises from the respondent. Put simply, the seller had provided information about how much the tenant of the relevant shops paid. However, the seller failed to mention that the tenant had been, amongst other things, granted a three-month rent-free period. In such a situation, the silence as to the rent-free period distorted the positive representation as to how much the tenant paid.

Finally, the application of the fourth exception is illustrated in With v O’Flanagan.^[6] The defendant sold a medical practice to the plaintiff. At the time of negotiations, a representation was made as to the profit levels of the practice. That representation was true at the time it was made, but due to a series of events the profit levels were considerably lower by the time the contract was signed. The Court held that the representation was to be treated as continuing up until the contract was concluded. Thus, the seller had a duty to communicate the changed circumstances to the buyer.

Ordinarily, it is not difficult to ascertain whether a representation is one of fact/law or not. Difficulties may, however, arise in the context of statements of intention. Generally, statements of intention are not “facts”; they are merely hopeful projections of what might happen in the future. For example, in Bissett v Wilkinson^[7] a seller of a farm had stated that the farm could carry 2000 sheep, which turned out to be incorrect. However, as both parties were aware that the seller was estimating the figure as he had never run sheep on the property, the Court held that the statement was one of honest opinion and this should have been apparent to the purchaser. Consequently, there was no representation of fact/law and thus, no grounds for rescission.

In contrast, in Edgington v Fitzmaurice,^[8] a company that borrowed money to repay debts, but claimed that they were borrowing the money to improve their buildings, was held to have made a misrepresentation as to fact. The Court noted that: “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”.^[9]

A case decided a year earlier is also of interest in this context, as it clearly explains the rational for this approach. In Smith v Land and House Property Corp,^[10] the plaintiffs sold an investment property to the defendant. In doing so, the plaintiffs had stated that the property was let to “a most desirable tenant”, but in fact the tenant was in arrears with the rent at the time of the sale. Bowen LJ noted that:

if 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 opinion. … The vendor state that the property is let to a most desirable tenant, what does that mean? I agree that it is not a guarantee that the tenant will go on paying his rent, but it is to my mind a guarantee of a different sort, and 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.^[11]

6.2.1.2 Untrue

Whether a representation is untrue or not may, in many cases, be determined by reference to objective facts. However, some guidance can be found in the majority judgment in Krakowski v Eurolynx Properties Ltd^[12]: “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”.^[13]

6.2.1.3 Intended for the other party to rely on

Due to the presumption in favour of reliance where the representation results in a contract (discussed below (6.2.1.4)), the matter of reliance has mainly been in dispute in the context of whether the party being induced into a contract actually relied upon the misrepresentation.

6.2.1.4 In fact relied upon by the other party

The first thing to note is that there is a presumption in favour of reliance where the representation actually results in a contract.^[14] Thus, it is for the party that made the representation to show that the other party did not rely on the representation in entering into the contract.

In Holmes v Jones,^[15] the seller of a property knowingly made a misrepresentation as to the number of cattle which came with the property. Having rejected the first offer, the buyer appointed an agent to provide a report on the property. That report included the correct number of cattle and advised the buyer to purchase the property at the original price. The buyer later claimed that he was not aware of the lower numbers of cattle and sought damages. While the Court recognised that the seller had made a misrepresentation, it held that, in the light of the agent’s report, it could not be said that the buyer relied on the figures mentioned in the misrepresentation.

Redgrave v Hurd^[16] involved a solicitor selling his practice and the adjoining premises. The Court held that, even though the falsity of the representation made as to the yearly profit gained from the practice could have been discovered if the buyer had studied the documentation provided by the seller, the buyer was entitled to rely on the misrepresentation:

The mere fact that a party has the opportunity of investigating and ascertaining whether a representation is true is not sufficient to deprive him of his right to rely on a misrepresentation as a defence to an action for specific performance … The representation once made relieves the party from an investigation, even if the opportunity is afforded. I do not mean to say that there may not be certain circumstances of suspicion, which might put a person upon inquiry, and make it his duty to inquire, but under ordinary circumstances, the mere fact that he does not avail himself of the opportunity of testing the accuracy of the representation made to him will not enable the opposing party to succeed on that ground.^[17]

Finally, it is not necessary that the misrepresentation be the sole reason for the party entering into the contract. In Gould v Vaggelas,^[18] the plaintiff purchased a resort from the defendant on the basis of the defendant’s representations regarding the profitability, occupancy rates and the financial return of the resort. The resort was subsequently unsuccessful, and the plaintiff sought damages on the grounds that the statements amounted to fraudulent misrepresentations.  The Court concluded that the statements were sufficiently factual in nature even though they contained an element of opinion. Further, the Court held that: “The representation need not be the sole inducement. It is sufficient so long as it plays some part even if only a minor part in contributing to the formation of the contract”.^[19]

6.2.2 Fraudulent misrepresentation (the tort of deceit)

In addition to the elements outlined above (6.2.2), fraudulent misrepresentation requires that the party making the misrepresentation knows the misrepresentation to be untrue, has no belief in the representation being true, or is reckless as to whether the representation is true.^[20] In Krakowski v Eurolynx Properties Ltd,^[21] the High Court noted that: “In order to succeed in fraud, a representee must prove, inter alia, that the representor had no honest belief in the truth of the representation in the sense in which the representor intended it to be understood”.^[22] In this context, it may also be noted that attempts by the representor to disclaim responsibility for the misrepresentation will generally not be effective.^[23]

Another difference between innocent and fraudulent misrepresentations is that a court can award damages for fraudulent misrepresentation to the extent that the innocent party has suffered damages as a consequence of relying on the misrepresentation.

6.2.3 Innocent misrepresentation

An innocent misrepresentation is a statement made in the honest but mistaken belief that it is correct. While fraudulent misrepresentation is based on both common law and equity, remedies in cases involving innocent misrepresentation stem only from equity. Further, in contrast to fraudulent misrepresentation, to succeed in an action based on an innocent misrepresentation it is not necessary to prove that actual damage has been suffered, or that the party making the representation had knowledge of, or was reckless as to, its falsity.

In Whittington v Seale-Hayne,^[24] an innocent misrepresentation was made as to the sanitary condition of premises being leased. The Court ordered that the contract be rescinded, and that the plaintiff obtain an indemnity in relation to certain expenses associated with the lease. However, the expenses recovered were less than what could have been recovered in damages had it been found that the misrepresentation had been fraudulent rather than innocent.

6.2.4 Negligent misrepresentation

A negligent misrepresentation is a careless statement made in circumstances where the representor owes a duty of care to the representee. In contrast to fraudulent and innocent misrepresentations discussed above, the tortuous act of negligent misrepresentation typically refers to situations where the person giving the representation is not a party to the resulting contract. However, negligent misrepresentations may also occur in pre-contractual negotiations between the parties to a contract.

In Hedley Byrne & Co v Heller & Partners Ltd,^[25] an advertising company had approached a bank to provide a credit report regarding a potential client. The credit report was favourable which prompted the advertising company to invest in an advertisement campaign on behalf of the client. It later turned out that the client’s financial situation was not as good as outlined in the credit report, and the advertising company took action against the bank in relation to damages it suffered from its investments. The Court found that such an action could succeed, but did not succeed in the case at hand due to a disclaimer included on the credit report stating that the report was provided “Without Responsibility On The Part Of This Bank Or Its Officials”.

The approach taken by the House of Lords in Hedley Byrne & Co v Heller & Partners Ltd^[26] was, in large parts, adopted into Australian law through the High Court’s decision in Mutual Life & Citizens’ Assurance Co Ltd v Evatt.^[27] In that case, the appellant (an assurance company) and the respondent were involved in a dispute regarding a statement made by the appellant. The respondent claims that the appellants jointly and severally gave him incorrect information and advice as to the security of his investments, actual and projected, in a company H G Palmer (Consolidated) Ltd (H G Palmer) and that in doing so, the appellants were in breach of a duty to be careful in giving such information and advice which they jointly and severally owed to him in the circumstances. It was held that the appellant did not hold itself out as having special skill as a financial adviser and therefore there was no liability. Thus, no liability was incurred for merely supplying a report on the affairs of a subsidiary to a policy holder at his request. The Court concluded that a special relationship arises only where the party giving the advice carries on the business of giving advice and lets it be known that she or he claims to have skill and competence in the field in question and is thereby prepared to exercise the usual degree of skill and competence exercised by persons carrying on that profession.

Shaddock & Associates Pty Ltd v Parramatta City Council^[28] involved the purchase of land. Solicitors acting on behalf of the buyer contacted the local council, both by telephone and in a letter, enquiring whether there were any planned road widening projects that would affect the relevant land. Put simply, the solicitors were informed that no such proposals existed, and the sale went ahead. Having signed the contract, the buyer discovered that there was in fact such a proposal which would have severe implications for the purchased land. The Court held that the local council was to compensate the buyer, noting that “the person giving the information to another whom he knows will rely upon it in circumstances in which it is reasonable for him to do so, is under a duty to exercise reasonable care that the information given is correct”.^[29]

6.2.5 Remedies in relation to misrepresentation

As is seen in Rules 8, 9 and 10, the remedies available depend on the type of misrepresentation that has been committed. For fraudulent misrepresentation and innocent misrepresentation, the courts can grant rescission or an order that the contract may not be enforced against the party to whom the misrepresentation was made. Further, in cases involving fraudulent misrepresentation, the courts may award damages.

In cases of negligent misrepresentation, the courts may grant an order for damages to the extent necessary to restore the party to whom the misrepresentation was made to the position it was in before the representation was made.