Tuesday, June 8, 2010

Contracts - Excuses for Non-Performance - Misrepresentation


  • Regulates provision of information during negotiations
  • Concerns false pre-contractual representations

Substantive Requirements

  • False material statement of fact
  • Made by one party to contract (representor) to other party (representee)
  • Induced entry into contract

Compare Breach of Contract

  • Potential overlap but different concept and remedies
    • Breach of contract=breach of promise
    • Misrepresentation=false inducement

Is Misrepresentation Obsolete?

  • S 52 Trade Practices Act 1974 (Cth)
  • S 9 Fair Trading Act 1999 (Vic)
  • Proscribe deceptive or misleading conduct
    • But must be “in trade and commerce”
    • Excludes private, non-commercial transactions

Types of Misrepresentation

  • Misrepresentation can be:
    • Fraudulent
    • Innocent or
    • Negligent
  • Bears on availability of damages
    • [but we are not talking about damages for breach here]

What is False Statement of Fact?

  • Must be statement of “past” or “present” fact
  • Can be express or implied
    • Eg-implied representation by conduct

What is not Statement of Fact Pt I

  • Puffs;
  • Honest opinions
  • Statements of intention
  • Statements as to the future
  • Statements of law [?]

Rationale for Fact Requirement

  • Facts always said to be true or false at time statement made
  • Reasonableness of reliance
  • But unsatisfactory nature of requirement has led to creative use of “implied representations”


  • Neither representation nor promises
  • Cf approach to promises


  • Honest opinion ≠ fact
  • Honest opinion = true at time despite later change of mind
  • But opinion carries implied representation that party holds opinion or knows facts to support opinion
    • Edgington v Fitzmaurice
    • Smith v Land & House Corp [“most desirable tenant”]
    • Bisset v Wilkinson [“farm could carry 2000 sheep”]

Smith v House and Land Corp

  • It is often fallaciously assumed that a statement of opinion cannot involve the statement of a fact. In a case where the facts are equally well known to both parties, what one of them says to the other is frequently nothing but an expression of an opinion. The statement of such an opinion is in a sense a statement of a fact, about the condition of a man’s own mind but only of an irrelevant fact for it is of no consequence what the opinion is. But if the facts are not equally known to both sides, then a statement of opinion by the 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.” P 15 per Bowen CJ

Statements of Intention

  • Statements of intention = statements concerning future conduct
  • True at time of utterance even if later change of heart
  • But statement carries implied representation that intention genuinely held Edgington v Fitzmaurice

Statements as to the Future involving Present Representations of Fact

  • Apparent statement as to future may conceal a statement of present fact – Balfour and Clark v Hollandia Ravensthorpe (1978) 18 SASR 240, 252

What is not a Statement of Fact Pt II - Silence

  • Non-disclosure problematic
  • Mere silence generally ≠ misrepresentation W Scott Fell & Co Ltd v Lloyd (1906) 4 CLR 572

Exceptions Pt I

  • Contracts uberrimae fidei (utmost good faith)
    • Insurance
    • Limited duty in case of guarantees-CBA v Amadio
  • Contracts involving fiduciaries
    • Partners or director/company
    • Trustee/beneficiary
    • Agent/principal McDonald v McKenzie [1927] VLR 134
    • Solicitor/client

Exceptions Pt II

  • Half-truths [silence distorts positive representation]
    • Dimmock v Hallet (1866) LR 2 Ch App 21
    • Krakowski v Eurolynx Properties Ltd (1995) 183 CLR 563 (E)
  • Duty to notify that statement no longer true
    • Davies v London and Provincial Marine Insurance
  • Duty to notify change of intention - Jones v Dumbrell
  • Duty to correct innocent misrepresentation once truth known
  • Two aspects
    • Intention to induce [seldom an issue]
  • Fraud
  • Intent to induce as part of targeted group Peek v Gurney (1873) LR 6 HL 377
Inducement in fact

Reliance I

  • Must be causal nexus between representation and entry into contract
  • Notwithstanding that representation false and fraudulent, if representee does not rely on it no case Gould v Vaggelas (1985) 157 CLR 215, 236 (Wilson J)
  • A fortiori if representee did not know of it

Reliance II

  • Onus of proof on representee
  • But if material representation is made which is calculated to induce representee to enter contract
  • and representee in fact enters contract then inference of inducement arises
  • Evidential burden then on representor to show no inducement Gould v Vaggelas per Wilson J

Reliance III

  • Inference may be rebutted by showing either:
    • Representee possessed knowledge of true facts
      • But cf Gipps v Gipps [1978] 1 NSWLR 454
      • NB-no duty to check truth Nocton v Lord Ashburton [1914] AC 923, 962.
  • Or representee made it plain that whether he/she knew of true facts, did not rely on representation Holmes v Jones (1907) 4 CLR 1692.

Reliance IV-Multiple Inducing Factors

  • Representation need not be sole inducement: sufficient that it played some part, even if minor part, in contributing to formation of contract Gould v Vaggelas
  • Eg - Edgington v Fitzmaurice (1885) 29 Ch D 459

Reliance V

  • No need to show contract disadvantageous (although often will be case) Demagogue v Ramensky (1992) 39 FCR 31, 32


  • Material representation = one which “reasonably induced the representee, that is, it was reasonable to rely on it.” Cheshire and Fifoot, 9th ed, para 11.40.
  • Not relevant where fraud involved Nicholas v Thompson [1924] VLR 544, 565-6
  • May be limited role in cases of innocent misrepresentation where no intent to induce

Rescission at Common Law

  • Only for duress, fraud or total failure of consideration
  • Conditional on restitutio in specie (exact restitution)

Rescission in Equity

  • Concurrent jurisdiction re duress and fraud
  • Rescission ab initio
    • Restoration of status quo ante
    • But monetary adjustments to do practical justice between parties
  • Auxiliary or exclusive jurisdiction in case of innocent misrepresentation

How to Rescind?

  • Contract voidable not void
  • Innocent party must elect to rescind

Bars to Rescission

  • Right to rescind may be lost if:
    • Affirmation [see notes]
    • Delay [see notes]
    • Intervention of third party rights
    • Rule in Seddon’s case
    • Merger of representation into terms of contract
    • Restitutio in integrum impossible

Restitutio Requirement

  • Rescission conditional upon return of benefits
  • Giving back on both sides
    • Restitution by wrongdoer
    • Counter restitution by innocent party
  • [ie- the ‘giving up which the plaintiff must do in order to qualify for restitution from defendant.’]

Restitutio Impossible

  • Where counter restitution impossible, loss of right to rescind
  • Defence or bar to rescission of restitutio impossible


Ratbag son

Sells shares

Third party

  • Maguire v Makaronis [in a non fraud context]

Equitable Adjustments

  • Monetary allowances or adjustments in lieu of precise restoration
  • Effect substantial restitution between parties
    • Rescission on terms
    • Conditional rescission
    • Indemnification

Examples of Adjustments

  • Court aims to do practical justice between parties
  • Alati:
    • Return of purchase price
    • Interest for use of money pending rescission
    • Redelivery of chattels
    • Sum for use of chattels
    • Credits for stock in trade disposed of

Rationale for Restitutio

  • He or she who seeks equity must do equity Vadasz v Pioneer Concrete
  • Prevent windfall to innocent party
    • O’Sullivan v Management and Agency and Music Ltd [1985] QB 428
  • Prevent wrongdoer retaining fruits of misconduct

Intervention of Third Party Rights

  • Eg-sale of property to 3rd party prior to rescission
  • No remedy unless excuse independent wrong
    • Fraud
    • Breach of fiduciary duty
    • Negligent misrepresentation

Pecuniary Restitution?

  • Even if actual property cannot be returned, return its value
  • Defence or bar to rescission of restitutio impossible

  • Hartigan v International Society
  • for Krisna Consciousness [undue influence case]


  • “In my view nothing has happened which makes it unjust that the defendant should be required to pay to the plaintiff the amount which it received on sale of the Rosebery Creek Farm. The amount received went immediately to reduce the defendant’s debt burden, creating an economic advantage in reduced debt which must be reflected in its overall position now. I see no injustice in restoring the defendant to the relative position of indebtedness which it would have been in if it had not received the proceeds of the sale.”

Rescission of Guarantees

  • Normally unconditional rescission ab initio
  • Creditor not restored to status quo ante
  • Contrast bilateral executed contracts
    • Benefits on both side
  • Guarantees
  • Partly executed
    • Guarantor does not received benefit of creditor’s performance so no duty to make restitutio
  • Guarantor’s obligations executory pending enforcement of guarantee

Partial Rescission

  • Can involve:
    • setting aside some but not all terms of contract Vadasz v Pioneer Concrete;
  • Search for a more proportionate remedy

Vadasz v Pioneer Concrete

  • Vadasz gave guarantee to Pioneer to ensure continued supply of concrete to his Co Vadipile
  • Vadasz told guarantee only covered future indebtedness but in fact covered past and future indebtedness
  • Pioneer sought recovery of all outstanding debts
  • Vadasz sought unconditional rescission-”all or nothing”
  • Decision
  • Part of guarantee relating to past indebtedness expunged
  • Liability for future indebtedness remained
    • Consistent with Vadasz’s understanding of his liability
    • Pioneer performed its side of bargain
    • Vadasz received indirect benefit from continued supply

Purpose of Equitable Remedies

  • To prevent, nullify or provide compensation for wrongful injury Vadasz 1995) 184 CLR 102, 115
  • Tailor remedy to loss actually suffered
  • Unconditional rescission = unwarranted benefit for V
  • Key Passage
  • Unconscionability works in two ways. In its strict sense, it provides the justification for setting aside a transaction. More loosely, it provides the justification for not setting aside the transaction in its entirety or in doing so subject to conditions, so as to prevent one party from obtaining an unwarranted benefit at the expense of the other. Vadasz at 114.

Rescission on Terms

  • Alternative to partial rescission [ie-rescission on condition that Vadasz pay cost of concrete supplied after guarantee executed] See Amadio (1983) 151 CLR 422, 428 (Deane J)
  • If conditions not satisfied, rescission never effected Maguire v Makaronis (1997) 188 CLR 449, 497, 499


  • No damages for innocent misrepresentation
    • But cf s 52 TPA
  • Negligent misrepresentation
  • Fraudulent misrepresentation
    • Tort of deceit Alati v Kruger

Tortious Measure

  • Damages for deceit assessed on tortious (not contractual) measure of damages
  • Reliance losses
    • Restorative in focus
    • Damages for loss of bargain not normally recoverable Gates v City Mutual Life Assurance
  • Measure of Damages for Tort of Deceit
  • [Plf] entitled to recover as damages a sum representing the prejudice or disadvantage he [or she] has suffered in consequence of his [or her] altering his or her position under the inducement of the fraudulent misrepresentations. Toteff v Antonas (1952) 87 FLR 647, 650.

Application of Measure to Contracts induced by Fraud

  • Compensate for any damage sustained by entering contract.
  • But quantum will depend on whether contract is rescinded or affirmed. Gould v Vaggelas (1985) 157 CLR 215.
  • Damages greater in cases of affirmation because plaintiff retains (usually less valuable) subject matter of contract.

Where Contract Affirmed:

  • Prima facie measure: difference between contract price and true value Potts v Miller; Toteff v Antonas
  • Plus consequential losses flowing directly from misrepresentation provided:
    • no double dipping
    • no intervening causes such as plf’s ineptitude
    • not too remote
      • Gould v Vaggelas (1984) 157 CLR 215, 221-222
      • Doyle v Olby (Ironmongers) Pty Ltd [1969] 2 QB 158,167.

Where Contract Rescinded

  • Prima facie measure inapplicable
  • But consequential damages recoverable in addition to adjustments in equity [discussed earlier]
    • Alati v Kruger (1955) 94 CLR 216, 222
      • Stamp duty
      • Legal expenses
  • Cost of improvements recoverable as damages
  • But probably not recoverable as part of restitutio unless performed in fulfilment of contractual obligation
    • Brown v Smitt (1924) 34 CLR 160, 165-6.

Damages where Applicant not Party to Contract

Measure of Damages

  • What loss has plf suffered because they altered their position in reliance on fraudulent misrepresentation? Gould v Vaggelas (1984) 157 CLR 215, 220-221 (Gibbs J)
  • Lending money to purchaser and giving guarantee to vendor two ways plf may suffer prejudice as a result of misrepresentation Gould v Vaggelas per Brennan J

Overlap in Causes of Action

  • Representation of fact can be both misrepresentation and term Alati v Kruger (1956) 94 CLR 216
  • If so, plf put to election:
    • Either rescission or
    • Damages for breach
  • Application of bar to rescission of Merger?
    • No application to fraud Alati
    • Nor it seems innocent misrepresentation Academy of Health and Fitness Pty Ltd v Power [1973] VR 254

Is Misrepresentation Inferior Remedy to Breach of Contract?

  • Depends on what losses innocent party has suffered
    • Eg, if loss of profits major concern
  • Otherwise rescission, restitutio plus consequential losses can be good option as per Alati


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