CQUniversity Division of Higher Education School of Business and Law

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1 CQUniversity Division of Higher Education School of Business and Law LAWS11062 Contract Law B Topic 2 Misrepresentation and Misleading & Deceptive Conduct Term 2, 2014 Anthony Marinac CQUniversity

2 Table of Contents 1.0 Introduction Objectives Prescribed Reading Key Terms Elements of misrepresentation Categories of Misrepresentation Innocent Misrepresentation Fraudulent Misrepresentation Negligent Misrepresentation Review questions Remedies for Misrepresentation Rescission Damages Review questions The Statutory Scheme: Misleading and Deceptive Conduct The Basic Principle Remedies Consumer protection Review questions Review Tutorial Problems Debrief

3 Topic 2: Misrepresentation and Misleading & Deceptive Conduct 1.0 Introduction This week we go right back to conduct which occurs even before contract formation. You may remember, back in the dim dark past that was Contracts A we discussed the distinction between terms and representations. The distinction, in short, was that terms create contractual obligations, while representations are pre-contractual statements usually designed to encourage the other party to enter into the contract. They are not intended to be, and indeed are usually not, enforceable obligations under the contract. This week we re going to look at the implications for a contract if, prior to the formation of the contract, a party has either misrepresented certain facts (that is, the party has told lies to gain an advantage) or the party has engaged in misleading and deceptive conduct, which is a slightly broader notion going beyond merely the words spoken. 3

4 An understanding of these concepts prepares you to move on next week to consider estoppel, one of the more unusual concepts of contract law. You should be careful to distinguish between misrepresentation or misleading and deceptive conduct on the one hand, and mistake on the other hand. As we saw last week, mistake occurs when a party has made a genuine misunderstanding on their own; misrepresentation, and misleading and deceptive conduct, occur on the basis of statements made by the other side. In many cases, as we will discover, the courts will not permit a party to profit from its own misrepresentation, or its own misleading and deceptive conduct. 1.1 Objectives After studying Topic 2 you should be able to demonstrate: An understanding of the elements of misrepresentation; An ability to distinguish between innocent, fraudulent and negligent misrepresentation; The use of rescission and damages as remedies where misrepresentation has occurred; and Specific prohibitions against misleading and deceptive conduct contained in the Australian Consumer Law, together with the remedies prescribed for breaches of these provisions. 1.3 Prescribed Reading 4

5 Lindy Willmott, Sharon Christensen, Des Butler and Bill Dixon, Contract Law (Australia Oxford University Press, 4th ed, 2013), Ch 13. ACCC v Dell Computer Pty Ltd (2002) 126 FCR 170 Alati v Kruger (1955) 94 CLR 216 Campbell v Backoffice Investments Pty Ltd (2009) 238 CLR 304 Curtis v Chemical Cleaning Company [1951] KB 805 Derry v Peek (1889) 14 App Cas 337 Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465 Jones v Dumbrell [1981] VR 199 Maguire v Makaronis (1996) 188 CLR 449 Redgrave v Hurd (1881) 20 CH D 1 Samsung Electronics v LG Electronics [2011] FCA 664 Sargent v ASL Developments Ltd (1974) 131 CLR 634 Shaddock & Associates Pty Ltd v Parramatta City Council (1981) 150 CLR Key Terms Innocent Misrepresentation: Misrepresentation occurring in circumstances where the person making the misrepresentation intends to tell the truth and believe they are doing so. 5

6 Fraudulent Misrepresentation: Misrepresentation occurring in circumstances where the person making the misrepresentation intends to lie. Misleading and Deceptive Conduct: A statutory term describing conduct which has a tendency to lead a person into error. Negligent Misrepresentation: Misrepresentation which occurs in circumstances in which the person making a misrepresentation was under a duty to ensure that they were telling the truth to the other party, but failed to meet that duty. 2.0 Elements of misrepresentation At common law, for misrepresentation to occur three elements must be present: First, it must be a false statement of a past or present fact. Sounds simple enough, right? However, have you noticed what is missing? A false statement of a future fact is not a misrepresentation. When you stop to think about it, this makes sense. By its very nature, a contract is full of promises about what people will do and how things will be in the future. A falsehood among those future statements of fact is much more likely to be a breach of contract, than misrepresentation. For us as lawyers, this makes it necessary to carefully consider both the grammar in which a statement is couched, and the actual intent of the statement: if it is not a statement of past or present fact, it cannot be misrepresentation. Second, the statement must be made to the other party at or before the time of contract formation. This has two implications: if you are overheard speaking to a third party, that cannot be misrepresentation because the 6

7 statements to a third party were never part of the precontractual negotiations. Furthermore, statements made after contract formation cannot be misrepresentation in the sense that word is being used here. Finally, the statement must be intended to induce the other party into entering into the contract, and it must actually have that effect. If the statement is made but not believed by the other party, or if it has no effect on the other party s decision to enter into the contract, then it is very difficult to argue that the other party has suffered as a result of the misrepresentation. 3.0 Categories of Misrepresentation There are three categories of misrepresentation: Innocent misrepresentation, where the person making the misrepresentation intends to tell the truth and believe that doing so; Fraudulent misrepresentation, where the person making the misrepresentation intends to lie; and Negligent misrepresentation, where the person making a misrepresentation was under a duty to ensure that they were telling the truth to the other party. The three categories were identified in a case called Derry v Peek (1889) 14 App Cas 337. In this case, a company issued a prospectus which indicated in part that they would obtain access to a mechanical (steam) tramway. The company honestly believe this was so, because they believe that obtaining such access would be a mere formality. Investors were persuaded by this statement in the prospectus to invest in the enterprise. You can guess what was to happen next. The company was not successful in obtaining access to the 7

8 mechanical trams, and the investors sued in the tort of deceit. In his judgment, Lord Herschell distinguished between conduct which merely resulted in a wrong statement being made (innocent misrepresentation), conduct in which the wrong statement was accompanied by some ill intent (fraudulent misrepresentation) and wrong statements by persons who were under a special duty to know and convey the truth (negligent misrepresentation). Let s look at each of these three in turn: 3.1 Innocent Misrepresentation As we have indicated above, innocent misrepresentation occurs when the person who makes misrepresentation has no idea that the things that are saying are wrong, and no intention of failing to tell the truth. You may remember from Contract A the tale of Curtis v Chemical Cleaning Company [1951] KB 805, in which the dry cleaning attendant inadvertently stated that the company s liability for damage extended only to beads and sequins; the company was therefore not entitled to rely on its exclusion clause when the fabric was stained in the cleaning process. This was a great example of an innocent misrepresentation. The girl behind the counter had no intention of telling a mistruth and probably had no idea that she had done so. A more authoritative example comes from the case Redgrave v Hurd (1881) 20 CH D 1. In this case, a solicitor had decided to retire and so he sought to sell the house he had been living in, which had the practice office attached. The idea was that the house would be purchased by another solicitor, who would become a partner in the practice. In order to secure the sale, he told a prospective purchaser that the practice brought in 300 8

9 per year, whereas in fact the figure was closer to 200. The misrepresentation was entirely innocent, and the mistake could have been discovered if the purchaser had looked carefully into the books. The court found that if the common law applied alone, the contract would have been binding because the purchase price was part of the written and signed contract, and any evidence about the misrepresentation would have been excluded by the parol evidence rule (remember that?). However equity was prepared to intervene to prevent the solicitor from gaining an advantage from his own misrepresentation. The contract was therefore rescinded As you may recall from previous studies, the usual form of remedy provided by common law is damages, while equity 9

10 includes a range of other more flexible remedies. Where an innocent misrepresentation has occurred, there are two likely equitable remedies available: First, if the innocent party is the plaintiff, they may seek to rescind the contract; that is, to set it aside; Second, if the misrepresenting party is the plaintiff and they are seeking specific performance of the contract, the innocent party maintained equity s assistance in resisting any order for specific performance. In other words, if the party makes an innocent misrepresentation they will likely be unable to enforce the contract, and they risk the other party having the opportunity to rescind the contract. 3.2 Fraudulent Misrepresentation Conceptually, fraudulent misrepresentation is probably the easiest type of misrepresentation to understand. It occurs under four conditions: when a party knowingly makes an untrue statement; when a party knowingly makes a partial statement, which may be true in itself but which has the effect of conveying a falsehood (for instance, if you stated I have had this car inspected when in fact what you had done is to have the cars paperwork inspected, not its mechanical condition); when a party makes a statement which may or may not be true, without caring whether it is true or false; and when a party makes a statement with no belief in its truth. Three of these were outlined in Derry v Peek, which we have discussed above. Fraudulent misrepresentation arising from a partial truth, comes from the case Peek v Gurney (1873) LR 6 10

11 HL 377. I won t go into the facts of this case in any great detail, but the misrepresentation allegedly arose from a statement in a prospectus which was only partially true Negligent Misrepresentation Finally we come to negligent misrepresentation. For those of you who have not yet discovered the tort of negligence, understanding negligent misrepresentation may be hard going. Broken down to its simplest level, negligence requires three elements: There must be a duty of some sort; The defendant must fail to meet the duty; There must be some harm arising from this failure. 11

12 If you can remember those three keywords duty, fail, harm then you are on the way to a basic understanding of negligence. How does it work for misrepresentation? Like this: One party must be under a duty to obtain and tell the truth to the other person. Not just as a courtesy, not just as a matter of ethics or good business practice, but an actual legal duty. That person must then fail in the duty, by making a statement which turns out to be a misrepresentation. There must be harm to the innocent party, and the harm must be immediately attributable to the misrepresentation. Let s have a look at a couple of examples and this will become much more clear. Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465, more commonly known as Hedley Byrne v Heller. In this case, Hedley Byrne obtained a new client called Easipower. Before extending credit to this new client, Hedley Byrne sought to obtain information from the client s bank about their creditworthiness. The bank gave them an appropriate reassurance. It turned out, of course, that the client was on a much less sound financial footing, and soon went into liquidation. Hedley Byrne sued in tort, successfully arguing that their economic loss had arisen from the negligent misrepresentation made by the bank. Can you see the three elements in this case? Duty: The bank, having chosen to provide this advice upon request, had a duty to Hedley Byrne to ensure that the information it was providing was accurate; 12

13 Failure: The bank clearly failed to provide accurate information; Harm: Hedley Byrne lost money when the liquidated company could not pay its bills, so the harm is fairly clear. Can you see how this works? Let s have one more example: In Shaddock & Associates Pty Ltd v Parramatta City Council (1981) 150 CLR 225, the plaintiff was considering the purchase of a block of land. The plaintiff s solicitor made all the usual checks, including a request to the council for a confirmation of whether there were any road-widening plans which might affect the land. This was one of a number of questions asked of the council. The council supplied a certificate which did not actually state that no road widening proposals were planned; however its silence on this point was taken to have the same meaning. The plaintiff purchased the land which was then affected by a road-widening proposal. Again, let s look for the three elements: Duty: The duty of the council towards the purchaser of land, as the authoritative provider of this information seems fairly clear; Failure: The failure of the council to provide accurate information seems obvious; Harm: the harm caused to the new landowner s interests is also clear; he would have been able to negotiate a lesser price from the land vendor if the road-widening plans were known. From the for example, you can see how negligent this representation works. In each case, there is no evidence to suggest that the misrepresentation was deliberate; however we can t really say that it was innocent either. The bank in the first 13

14 case, and the council and the second case, were under a special duty to get the information right. They failed in this duty, and harm was caused to the recipient of the information. This is negligent misrepresentation. 3.4 Review questions Question 1 Misrepresentation applies to which types of fact: a) Past facts b) Present facts c) Future facts within the control or knowledge of the representing party d) Future facts beyond the control of either party Answer: (a) and (b) Question 2 What is the effect of belief upon a misrepresentation? (a) If the party making the misrepresentation believes it to be true, the statement is not in fact a misrepresentation. (b) If the party receiving the representation does not believe the representation, then it is not misrepresentation. (c) A reasonable person must believe the representation, or else it is no misrepresentation. (d) If both parties believe the misrepresentation, it is binding upon both parties. 14

15 Answer: (b) Question 3 Which of the following is not a category of misrepresentation? (a) Innocent misrepresentation (b) Equitable misrepresentation (c) Fraudulent misrepresentation (d) Negligent misrepresentation Answer: (b) Question 4 Which of the following is not an element of negligent misrepresentation? (a) The representing party must be under a duty to tell the truth; (b) The representing party must fail in their duty to tell the truth; (c) The representing party must know they are failing in their duty to tell the truth (d) The failure to tell the truth must cause harm to the innocent party Answer: (c) 4.0 Remedies for Misrepresentation There are two remedies available under the general law for misrepresentation. These are known as rescission and damages. Rescission is available for all three types of misrepresentation; however damages are only available for fraudulent and negligent misrepresentation. 15

16 4.1 Rescission The remedy of rescission ends the contract, and seeks to return the parties to substantially the positions they were in prior to entry into the contract. Ideally, neither party should benefit and neither party should suffer as a result of the misrepresentation having taken place. Once the contract has been rescinded, neither party has any further obligations under the contract. There are, however, a number of limitations upon this remedy: It must be possible to return the parties substantially to their positions prior to the commencement of the contract. If this is not possible, for instance if one party has already suffered a substantial financial loss which cannot be repaid, rescission may not be possible. This point was made in a rather complex High Court case called Maguire v Makaronis (1996) 188 CLR 449, which is almost impossible to deal with until you have completed equity law. Just take my word for it. Having said this, the court will not give up on people s rights easily. If the court can find a way to return parties to their original positions by, for instance ordering the payment of money or the return of purchase money, then it will do so. This is what occurred in Alati v Kruger (1955) 94 CLR 216, another case in which a person selling a business (this time a fruit business) made misrepresentations about the takings of the business. As soon as these became clear the purchasers sought rescission of the purchase contract; however in the meanwhile, the business had declined and eventually ceased operating altogether. As there was no business any more, the Court could hardly just order a return to the vendor of the business. However the court still allowed rescission, and focused on returning the parties to the financial position they had occupied prior to the formation of the contract. 16

17 The innocent party must not have affirmed the contract. If the innocent party learns of the misrepresentation but carries on regardless, instead of seeking some remedy for that misrepresentation, the innocent party is taken to have accepted the misrepresentation and will lose the subsequent opportunity to seek a remedy. So, in Sargent v ASL Developments Ltd (1974) 131 CLR 634, the appellants were involved in the sale of land, and there were questions about the town planning status of that land; for a period of some months after these questions were resolved they received interest payments on the sale, but then finally sought to rescind the contract. The court found that they were unable to do so, because their conduct in receiving the payments amounted to an affirmation of the contract. 4.2 Damages 17

18 The second form of remedy which the courts may allow for misrepresentation is the payment of damages. There are three things you really, really, really need to understand about the payment of damages for misrepresentation: First, damages are only available for fraudulent and negligent misrepresentation. In the exam, please don t seek damages for innocent misrepresentation. I will fail you, and you will hate me. Second, when damages are available, they can be awarded in addition to rescission. So, for fraudulent and negligent misrepresentation the court can award rescission, damages, or both. Finally, the intention of damages is to place the innocent party in the position they would have been if the contract had been successfully completed. Think about this carefully: unlike rescission, damages seeks to give the innocent party the financial benefit they were anticipating as a result of the contract. For damages to be awarded, more is required than simply proof of the misrepresentation. The following three additional elements must also be shown: First, the plaintiff must show that the party who made the representation intended them to act upon that representation; Second, they must show that they actually did so. For instance, if they regarded the representation as irrelevant, or if they did not believe it, then they did not act on the basis of that representation, so no damages will be available; 18

19 Third, there must be harm. If the plaintiffs have not suffered as a result of the misrepresentation, no damages will be awarded Let s have a look at an example. Jones v Dumbrell [1981] VR 199 concerns a company involved in the manufacture of children s toys. Jones was one of the company founders, and he had been joined by a small number of other partners along the way. Dumbrell sought to purchase the company, at a time when Jones was looking to retire. Dumbrell represented to Jones that he intended to purchase the company as a going concern, to be operated by the Dumbrell family. As a result, because Jones was attracted to the idea of the company remaining of family company, Dumbrell was able to negotiate on favourable terms. 19

20 The court did not ultimately decide whether Dumbrell had ever intended to operate the company is a family business; however it is clear that before the time of contract formation, he had decided to purchase a company for resale to another corporation. He did not tell this to Jones, and indeed took steps to ensure that Jones did not find out. When the sale went ahead, and the resale soon followed, Jones sued. So, what do we think about this particular situation? The misrepresentation itself is fairly clear to see. Dumbrell has made a statement of fact which he knew to be false so if there is misrepresentation, it is fraudulent misrepresentation. Are the other three elements there? First, we ask if Dumbrell intended for Jones to act upon his representation. It seems fairly clear that he did, in the sense that he knew that Jones would negotiate differently if he was selling a family concern, compared to how he might negotiate if he was selling for resale. This element seems to be met. Second, we ask whether Jones did act upon that representation. Again, it seems fairly clear that he did. James completed the negotiations on the basis that he was selling the business as a family enterprise to another family. Finally, we must ask whether there is harm. At first, it might seem as though there was no harm in this situation. After all, Jones got what he felt was a fair price for the business, and after he no longer owned the business it should really not be his concern what happens to it. However the court saw it differently. Clearly when Dumbrell sold the business he obtained a higher price than he paid for it. Had Jones known of this then he might have expected to participate in this profit. The loss of this profit was the harm to Jones. 20

21 As a result, it is clear that all the elements supporting damages for fraudulent misrepresentation are present. 4.3 Review questions Question 5 What is the purpose of rescission as a remedy for misrepresentation? a) To penalize the party which was responsible for the misrepresentation b) To compensate the innocent party for the results of the misrepresentation c) To return the parties substantially to their position prior to the contract d) To compel the misrepresenting party not to resile from their misrepresentation Answer: (c) Question 6 For which of the following can damages be awarded? (a) Innocent misrepresentation (b) Equitable misrepresentation (c) Fraudulent misrepresentation (d) Negligent misrepresentation Answer: (c) and (d) 21

22 5.0 The Statutory Scheme: Misleading and Deceptive Conduct One thing you may have noticed about the discussion of misrepresentation in the previous pages is that it is focused almost entirely upon judge-made law. And yet, as we have discovered throughout our study of contracts, statute law is becoming more and more relevant to the way business is done in Australia. Now that you understand misrepresentation from the perspective of general rule, we must move on to consider how Statute has affected the requirement for truthfulness in business in Australia. Essentially what has happened is that provisions which were previously enacted in the Trade Practices Act 1974 have been re-legislated in the Australian consumer law. 5.1 The Basic Principle The basic statutory principle was initially set out as s 52 of the Trade Practices Act (where it applied only to corporations) and is now set out as s 18 of the ACL. It reads as follows: A person must not, in trade or commerce, engage in conduct that is misleading or deceptive or is likely to mislead or deceive. Such a simple set of words, with such wide-ranging implications! To understand them, we need to break the provision down into its constituent elements. A person: in this context, a person includes a corporation, a natural person, the service or includes the corporation, and government entities where they are carrying on a business. 22

23 Trade or commerce: The ACL provides no protection in relation to representations made outside the context of trade or commerce. Trade or commerce is given a fairly wide definition, but sales or investments of a purely private nature, between individuals and absent a normal commercial context, will not be subject to the ACL. In such circumstances, the contracting parties must rely on the general law. Engaging in conduct: Conduct may include words, whether written or oral; actions; and even silence, if the effect of the silence is to bring about a misleading or deceptive result. Misleading or deceptive: It is not enough simply to show that the outcome of the conduct was that a person was misled and that harm occurred; it might have been, for instance, that the conduct of the representing party was clear, but was misinterpreted by the other party. When deciding whether conduct was misleading or deceptive, the court will consider the position of the person to whom the representation is made, and then will consider whether the conduct complained of has a tendency to lead a person into error. [Campbell v Backoffice Investments Pty Ltd (2009) 238 CLR 304]. So, let s have a look at how this works in practice. Rather than picking out one of the authoritative cases (given that we are, after all, dealing with fairly new statute law) I have picked out a relatively recent case with an interesting set of facts. In Samsung Electronics v LG Electronics [2011] FCA 664, Samsung complained that a range of LG advertisements comparing LG s 3D home television technology with that of its competitors amounted to misleading and deceptive conduct because LG was making false and misleading statements about the performance of competitor products, impliedly including Samsung products. So, what do we think? 23

24 First, it is quite clear that LG, being a corporation, is a person for the purposes of the ACL. Second, it is also quite clear that LG was engaged in trade or comments, as its purpose was to sell more televisions. Third, it is clear that LG engaged in conduct, that is, by developing the television advertisements and then paying for their display. Finally, the case came down to the question of whether the advertisements were misleading or deceptive. The reference I have given above was an interlocutory proceeding, and no final proceeding has yet taken place. The judge in the interlocutory proceeding, however, found that it was not sufficiently clear that LG s advertisement amounted to misleading or deceptive conduct. Have a look at the judgment for yourself and see if you agree. 5.2 Remedies The most substantial remedy offered by the ACL in cases where a person on corporation has breached s 18 of the ACL arises in s 236 of the ACL, which allows the two forms of action. First, a person who has suffered loss or damage as a result of the misleading and deceptive conduct may seek compensation for that loss. It should be noted, however, that this will generally be limited to compensating them for any payments they may have made up to the point of the case; it will not compensate them for the expected benefits they might otherwise have received under the contract. It may be that under those circumstances, the general law of damages may be more appropriate for some clients. Second, the ACL allows the regulator (i.e. the ACCC) to take action on behalf of a class of consumers, without requiring those consumers to make their cases separately. 5.3 Consumer protection 24

25 The ACL provides a range of specific prohibitions in relation to representations which might ordinarily be made in the course of advertising, or in the course of sharp or slightly shonky business practices. Under s 29 of the ACL it is prohibited from doing any of the following in relation to the supply of goods or services: Misrepresent the standard, quality, value, grade, composition, style or model of the product or service; Misrepresent the history of the product or service; Claim that goods are new when they are not; Falsely claim that someone has agreed to purchase goods or services; Publish false testimonials about a product or service; Publish false claims about sponsorship, approval, performance characteristics, accessories, uses or benefits of a product or service; Misrepresent the price of a product or service; Misrepresent the availability of repair services; Misrepresent the place of origin of the product; Misrepresent the nature of any warranty or guarantee; and finally Try to make a consumer pay for a statutory warranty. Let s have a look at one last example, ACCC v Dell Computer Pty Ltd (2002) 126 FCR 170. Dell Computers was (and perhaps even remains) a powerhouse computer supplier in the first decade of the century. Their competitive advantage was to sell computers cheaply by not maintaining retail stores. All their products were sold online or over the phone and were delivered to the consumer. This meant, of course, that the consumer was required to pay a delivery fee. There was no way to avoid the delivery fee, for instance by collecting the computer from a 25

26 distribution point. The delivery fee was therefore not really in the nature of the fee. Rather, the delivery fee was part of the overall unavoidable charge for any person who wished to purchase a Dell computer. Dell s advertising included a very prominent display of the sale price for their computer, which was generally cheaper than equivalent computers at retail stores. The advertising then contained an asterisk which pointed to the delivery fee in much smaller type. Because the delivery fee was an intrinsic part of the price every customer would be required to pay to Dell, the ACCC alleged, and the court found, that the company had misrepresented the price of the computer Review questions Question 7 26

27 For the purposes of s 18 of the ACL, which if the following can be conduct? a) Physical actions b) Written words c) Oral words d) Silence Answer: (a), (b), (c), (d) Question 8 Which of the following is not prohibited by s 29 of the ACL? a) Misrepresenting the place of origin of a product b) Misrepresenting the price of a service c) Misrepresenting the identity of the seller; d) Misrepresenting the quality of a product. Answer: (c) 6.0 Review Misrepresentation, and misleading and deceptive conduct are essentially the same thing; misrepresentation refers to the body of common law and equity which built up to protect contracting parties from innocent, negligent and fraudulent misrepresentation by other contracting parties; misleading and deceptive conduct refers to the statutory equivalent of the same behaviour. In general, misrepresentation will entitle the innocent party to rescission of the contract, and if the misrepresentation has been 27

28 fraudulent or negligent (and if the innocent party has suffered a harm as a result) the innocent party may also be entitled to damages. The Australian Consumer Law provides a range of remedies (including primarily compensation) in circumstances where a person or corporation has engaged in misleading or deceptive conduct in the course of trade or commerce. The ACL goes far beyond the general law in the parties engaged in misleading and deceptive conduct may also be subject to punitive sanctions. The bottom line for both of these schemes is that parties, when negotiating contracts, are not at liberty to simply mislead one another in order to obtain an advantage. Assertive negotiation is allowed; however outright misrepresentation will usually entitle the innocent party to the court s protection. 7.0 Tutorial Problems Problem 2 How do we Solve a Problem like Maria? Please watch the short animated video at the following link, then consider the questions below. For the purpose of this exercise, you are to ignore the questions of contract formation (including consideration, and intention to create legal relations). 28

29 What sort of misrepresentation has Maria engaged in? What remedies would our client have against Maria? Does the reason for the loan matter? If Maria was to commence paying off the loan in accordance with the agreement, does it matter that she lied about the purpose of the loan? How does the existence of the written contract affect our client s position in law? [30 Minutes] 8.0 Debrief After completing this topic you should recognize: That misrepresentation requires: o A false statement of a past or present fact, and o The statement to be made at or before the time of contract formation, and o The statement to be made in order to induce the other party to enter into the contract; That innocent misrepresentation occurs where the person making the misrepresentation intends to tell the truth and believe they are doing so; That fraudulent misrepresentation occurs where the person making the misrepresentation intends to lie; 29

30 That negligent misrepresentation occurs where a party: o is under a duty to tell the truth, and o fails in that duty, and o the failure causes harm to the innocent party. That all three types of misrepresentation may result in rescission of the contract, if rescission is possible; That fraudulent and negligent misrepresentation may result in an award of damages; That an award of damages requires: o The party making the representation to intend it to be relied upon, and o The innocent party actually relying on the representation, and o Actual harm to the innocent party; That the Australian Consumer Law states that a person must not, in trade or commerce, engage in conduct that is misleading or deceptive or is likely to mislead or deceive; and That the Australian Consumer Law prohibits a range of very specific types of misrepresentation which may affect consumers. 30