Affirmation

Given that an innocent party has a right to rescind, he or she can elect not to do so. The principle of affirmation states that, when a party has the rights to rescind but instead of rescinding the contract chooses to ‘affirm’ or go through with the contract instead, their right to rescind is lost

Coastal Estates Pty Ltd v Melevende - No affirmation was held here

Facts: The plaintiff bought blocks of land on a seaside estate, induced by misrepresentations made by the vendor. After knowledge of the falsity of the vendor’s statements the purchaser still made some payments. The vendor argued that the plaintiff thereby lost the right to rescind.
Held: That there was no affirmation as at the time of the payments the purchaser had not yet consulted his solicitor and was unaware of his rights to rescind. No estoppel arose because it was not shown that the payments had caused the vendor to be prejudiced in any way.

·        Decision is controversial as it seems to be at odds with the law regarding discharge of breach. Also:

·        It found that the representee must also be aware of the right to rescind as well as the fact that a misrepresentation has taken place. However this proposition has been rejected in Sargent v ASL the HC left the proposition open

Rights of Third Persons
 
If property under a contract has been passed to a 3rd party - who has acquired the property in good faith and consideration has been given for that property - then the contract cannot be rescinded. The rights of the third party prevail and are paramount over those that have the right to rescind. As seen in,

Lewis v Averay - Original right to rescind is lost.

          Lapse of Time

The mere lapse of time will not usually deny the representee the right to rescind. However a lapse of time is usually an indicator as to whether or not affirmation has occurred.

Leaf v International Galleries - Court held that the plaintiff had ample time to have the painting examined for it authenticity (5 years)

Note: Non-fraudulent misrepresentation - clock starts ticking from the date of the formation of the contract.

Fraudulent misrepresentation – time begins to lapse in the time the fraud is discovered.

The rule in Seddon’s Case

    * Rule in Seddon’s case states that there can be no rescission for innocent or negligent misrepresentation once the contract is fully executed. Rule applies for the sale of land and to some sales of shares BUT:

   1. Seddon’s case was only a single judge decision
   2. Other reasons were given for the decision
   3. The case relied on as authority for the proposition was a case concerning a contract for the sale of land, where s Seddon’s case involved sales of shares and the judge used the principle that applied to contracts generally.

· The ‘rule’ has been criticized as unjust if applied generally. In NSW the rule was held to be applicable to the sale of goods. (Leason v Prince’s Farm), but has now been abolished by amendment to the Sales of Goods Act 1923. It has been applied to the sale of a business in NSW in Vimig v Contract Tooling

Exclusion Clauses
 
A contract may contain a term to the effect that pre-contractual statements cannot be relied upon by the parties to the contract. Such terms can have the effect of precluding a right of rescission for non-fraudulent misrepresentation, as seen in Byers v Dorotea

Damages In Tort

General - Types of misrepresentation

If the misrepresentation is fraudulent the remedy of damages in the tort of deceit is available.

If the misrepresentation is made negligently, the remedy of damages in the tort of negligence is available.
 
However, if the misrepresentation is neither fraudulent nor negligent, there is no available remedy in tort law. In cases of such innocent misrepresentations there will be, however, no other common law remedy but statutory remedies pursuant to legislation dealing with misleading or deceptive conduct

Remedy for Damages in Tort

Tort of Deceit
 
To establish a case in deceit the representee needs to establish that the misrepresentation is also fraudulent. The principles that must be proven are seen in Derry v Peek.

The principles of fraudulent misrepresentation has its origin in Derry v Peek:

First, in order to sustain an action of deceit, there must be proof of fraud, and nothing short of that will suffice.
 
Secondly, fraud is proved when it is shown that a false representation has been made:

(1)   Knowingly, or
(2)   without belief in its truth, or
(3)  made it recklessly, not caring whether it be true or false

Thirdly, if fraud were proved, the motive of the person guilty of it is immaterial. It matters not that there was no intention to cheat or injure the person to who the statement was made.

* A Misrepresentation, regardless of the type, renders the contract voidable at the option of the representee. When the right to rescind is lost, the remaining remedy is damages.
 
* As the fraudulent representation does not form part of the contract, the representee cannot seek damages for breach. Nevertheless, damages are available in tort for deceit (that is, fraud). In addition, these damages can be claimed even when the representee choose to affirm, and not to rescind the contract.
 
When pleading and proving fraud, it is essential that fraud be distinctly alleged and proven. The difficult evidential burden is seen in, Krakowski v Eurolynx Properties Ltd
 
Tort of Negligence
 
The tort of negligence ‘properly connotes the complex concept of duty, breach, and damage thereby suffered by the person to whom the duty was owing’
 
OR
 
Negligence, as a tort, comprise three elements:

1) A duty of care
2) Breach of that duty by the defendants, and
3) Loss or damage (Suffered by the plaintiff) caused by the breach.
 
Thus, in an action in negligence misrepresentation the plaintiff needs to establish the following:

(a) The existence of a duty of care owed by the defendant to the plaintiff;
(b) A breach of the duty of care by the defendant; and
(c) Loss or damages suffered by the plaintiff that was caused by the defendant’s breach of duty

Hedly Byrne principle

In Hedly Byrne & Co Ltd v Heller & Partners Ltd, established the principle, namely, the recognition of a tortuous liability for a statement carelessly made and not constituting fraud.

Giving negligent advice does not cause an immediate loss. The loss suffered depends on how the advice is used, a matter over which the representor (defendant) may have no control.
 
If a statement satisfies the elements above then you can bring an action. If the statement also satisfies the elements of misrepresentation then you can bring an action for negligent misrepresentation. However so long as you prove the elements of the tort of negligence, then you will get damages for economic loss.

The most difficult issue in negligence is the question of whether there exists a duty of care
 
The Hedley Byrne principle was adopted by the High Court in Mutual Life and Citizens Assurance Co Ltd v Evatt, where Barwick CJ stated that the duty of care arises, where a person gives information or advice to another:

“Upon a serious matter, in circumstances where the speaker relies or ought to realise that he is being trusted…to give the best of his information or advice as a basis for action on the part of the other party and it is reasonable in the circumstances for the other party to act upon that information or advice”

OR

a) The representor must be aware that ‘he is being trusted to give the best of his information or advice’ to the representee;
b) The subject matter of the representation, whether information or advice, is of a serious or business nature;
c) The representor must realize that the representee intends to act upon the representation;

d) It must be reasonable, given the circumstances, for the representee to rely on the representation.
 
Pre-contract misrepresentation
 
In Esso Petroleum Co Ltd v Mardon, the case illustrates the situation where the duty of care arises between parties negotiating a contract.
 
The duty of care arise whereby the plaintiff request for information and the information is given in the form of a representation made with the intention of inducing entry into a contract, the duty of care will be readily found and treated as breached if the entry into a disadvantageous contract was induced by the representation.
 
Lord Denning MR said “If he negligently gives unsound advice or misleading information…and thereby induces the other side into a contract with him, he is liable in damages”.

Seriousness of the occasion

The situation where the council was held liable for giving advice, where the duty of care is likely to be found and more formal occasion in which it is appropriate to find a duty of care, is seen in:

L Shaddock & Associates Pty Ltd v The Council of the City of Parramatta City (1981)

Facts: Shaddock Solicitors (Shaddock being the plaintiff, appellant) phoned the council to inquire whether the land being purchased by his client was affected by a local road-widening proposal, and he was told it was not.
He made the same inquiry in a standard form of written request for information, which it was, the council’s practice to answer, and its response showed no proposal.
Shaddock completed the purchase and suffered damage when it was discovered that in fact a road-widening proposal existed in the council’s records. Waddell found that the Council had been careless but that it owed no relevant duty of care to the plaintiffs and their appeal to the Court of Appeal was dismissed. The appellants then appealed to the High Court.
Issue: Whether a negligent misrepresentation existed?
Held + Reasoning: Appeal allowed

Gibbs: “It is now settled by the decision in Hedley Byrne v Heller that a person can be liable for financial loss resulting from a negligent misstatement of fact or opinion, although the misstatement was honestly made, and there was no fiduciary (legal trust) or contractual relationship between the parties” 

“I can see no reason in principle why a person who, being possessed of special knowledge or means of knowledge, undertakes to impart information to another, and is aware that the other will act in reliance on the information should be in a different position from a person who, being possessed of special skill, undertakes to advise another, knowing that the other will act on his advice.”

“In either case, 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”

Innocent Misrepresentation

An innocent misrepresentation is an untrue representation made by a representor, who at the time of making the statement, believed it to be true (and therefore had no intention to mislead), or who was not negligent. In other words, the misrepresentation was made neither fraudulently nor negligently.

Apart from raising innocent misrepresentation as a defense to specific performance, the only remedy is rescission. As there is no right to claim damages, a representee who loses the right to rescind the contract has no further remedy.

The law of restitution is concerned with situations in which a plaintiff may recover a money sum equal in value to a benefit obtained by the defendant at the expense of the plaintiff - the giving back of something improperly retained.

- A defendant is subject to a liability in restitution whenever the circumstances indicate that the receipt or retention of a benefit obtained by the defendant from the plaintiff is unjust.

3 elements:

1. Benefit
2. At the Plaintiffs Expense
3. Injustice

An action for restitution is not a contractual one, it is not based on a wrong

Quantum Meruit – An action by a plaintiff to recover a reasonable sum of money for the provision of goods and services.

Pavey & Mathews v Paul (1987)

Facts: Pavey (appellant – plaintiff) orally agreed to renovate a cottage at Swansea Heads for Mrs Paul in return for a reasonable remuneration calculated by reference to the prevailing rates of payment in the building industry.
Issue: Whether the plaintiff is entitled to restitution of the cost of the work and materials in a quantum merit?
Held: Appeal allowed (by majority)

Vitiating Factors

Factors that may affect the quality of the consent that one or both parties have given to the entry into of a contact.

Misrepresentation

A misrepresentation is a false statement of a material fact may by one person (the representor) to another (the representee) in order to induce the representee to enter into the contract and which has this effect.

A fraudulent misrepresentation generates a right to damages for deceit; a negligent misrepresentation may generate a right to damages in negligence.

- If the statement made is not a term of the contract then it may be a representation.

Elements of Misrepresenation

The statement must satisfy the following points:

A – Statement must be one of fact
B - Must be false
C - Reliance it must induce the representee to enter into a contract.

The Represenation must be a statement of Fact

- Statements must be of a past or present fact.
- Traditionally statements of fact do not include statements of law so that a misstatement of the law cannot be a misrepresentation because there is a ‘legal fiction’ or presumption that ‘all people know the law’.

Davis Securities v Commonwealth Bank Of Australia.

- The traditional rule amounts to a misrepresentation in the following circumstances:
- If the misstatement was as to a persons private legal rights.
- If the misstatement of law was a deliberate or willful one.
- If the misstatement was a composite one of both fact and legal issues.
- Statements of opinion, intention , or of law, are not representations.

- Advertising or sales “puffs” are not statements of facts along with promises or assurances as to the future.

Balfour and Clark v Hollandia Ravensthorpe (1978) - SC of SA, Full Court

Facts: Balfour and Clark (the plaintiffs, respondents) purchased a Hollandia home at Happy Valley on short-teerm finance provided by Hollandia, and took possession.
Issue: Was the statement a misrepresentation?
Held: The plaintiffs succeeded.

Bray: “In my view in the circumstances of this case the representation was clearly false by reason of what was omitted from it. fraud may consist in suppression veri as well as in suggestion false”

* Misstatements of future intention – If you know that your intention to do something in the future is a complete life then it will be a misrepresentation.

* Statements of Opinion – general proposition is that an inaccurate opinion does not amount to misrepresentation. If the opinion statement is made on the basis of facts that are known only to the representor then the opinion becomes a misstatement of fact.

Representation Has To Be False

It can be verbal or can be the conduct also i.e. a wink. However there is no obligation on a person to disclose facts. Contracts said to be of ‘utmost good faith’ allows both parties to disclose material facts and a failure to do so amounts to false representation.

- If a statement made is partially true – the failure to disclose the ‘full story’ still amounts to a misrepresentation.
- If a statement made before the contract is true but overtime it changes the truth must be disclosed. The failure to disclose on these counts is said to be fraudulent misrepreseantion.
- If the representor is never aware of the misstatement that it will be classified as innocent misrepresentation. Demagogue Pty Ltd v Ramensky

Reliance On the Representation

The representation must actually induce the representee to enter into the contract. The representation need not be the sole inducement, provided it is one of the factors that influenced the representee to enter into the contract.
- I.e. the representee must’ve relied on the statement upon entering the contract.

Holmes v Jones

Facts: Jones and others (plaintiffs, respondents) purchased a pastoral property from Holmes and other, and subsequently claimed damages for an allegedly fraudulent misrepresentation as to the number and ages of the cattle upon the property
Issue: Whether the plaintiff relied on the representation?
Held: Appeal allowed.

Griffith: “It appears to me to be common sense as well as law that, when a purchaser chooses to rely upon his own judgment or upon that of his agent, he cannot afterwards say that he relied upon a previous representation made by the vendor”

- Representee must establish that a false statement was made and there was a calculation that the said statement induced you into the contract – you have then prima facie established misrepresentation.

- If the representee is aware of the falsity of the statement – that can no longer be an inducing statement.

- The onus is not on you to test the truth of the statement being made.

The Issue of Materiality

Does the statement made have to be one of a material fact. It is an element of establishing reliance however it is harder to do is the statement is a material fact; Nicholas v Thompson
 
Remedies For Misrepresentation

Recission: This is the right to set aside a contract - The purpose of rescission is to put the parties back into the position they were in before the contract was entered into referred to by latin phrase restitution in integrum: Abram Steamship Co Ltd v Westville Shipping Co [1923].

Rescission takes effect from the date and time of communication by the representee to the representor  à the innocent party must, as a general rule, clearly and unequivocally communicate his or her election to rescind to the other party: Immer (No 145) Pty Ltd v Uniting Church in Australia Proprty Trust (NSW) (1993).

A representee can generally elect to rescind a contract notwithstanding that the representation became a term of the contract.

A representee cannot seek rescission for misrepresentation and sue for damages of a breach of a term of the contract.

Damages in Tort:

The meaning of Restitutio in integrum

    * The purpose of rescission is to bring about Restitutio in integrum - if this cannot be achieved a contract cannot be rescinded.

It is restoring the contract parties to their pre-contractual positions.

    * The right to rescind in common-law (as compared to equity) is quite restrictive – rescission at common – law was kept to fraudulent misrepresentation.

Common–law restitutio requires EXACT restitution in integrum and if they could not be restored exactly then rescission is not available.
Equity it only requires restitutio in SUBSTANCE – the fact that they were not exactly in the same position did not matter:

Altli v Krugner (1955)

- Krugner (plaintiff) was induced to purchase a fruit shop from Atali by representations that the average takings were 100 pounds per week
- Krugner found representations to be false within two weeks and commenced proceedings for recission.
- He carried on with the business for several months, but closed it down and left the premises before judgement was given
- Townley declared that the contract was lawfully rescinded by Krugner and all copies to be cancelled.
- When Alati appealed to the High Court it was dismissed.
- The judges stated: ‘…it is necessary here to apply the doctrines of equity, and equity has always regarded as valid the disaffirmance of a contract induced by fraud even though precise restitution in integrum is not possible, if the situation is such that, by the exercise of its powers including the power to take accounts of profits and to direct inquiries as to allowances proper to be made for deterioration, it can do what ispractically just between the parties, and by doing so restore them substantially to the status quo’

- Krugner was entitled to rescind and obtain a decree declaring and giving effect to the rescission as an avoidance of the transaction from the beginning.

- The remedy was discretionary but in the circumstances it was impossible to convict Krugner of any unfairness in discontinuing the business, and he had not lost his right to a decree.


Rescission is different to other remedies because in others that plaintiff makes an application to the court and it’s the court that declares the remedies - in rescission it is not an order of the court – it is an act of the contracting party itself.

Until the notice of rescission is communicated the contract remains valid until rescission takes place à contract is voidable but not void - Significance of the issue lies in ascertaining the date the contract is rescinded.

If rescission is the act of the party, rescission takes place when the party seeking to rescind gives not of rescission to the other party - if it is an order of the court, it takes place when the court order is made: Alati v Krugner

    * The role of the court is to adjudicate on the validity of the rescission which arises in relation to three things:

         1. was there misrepresentation?
         2. whether or not restitutio in integrum has been or can be achieved - if it has not or cannot then rescission cannot be granted: Kramer v McMahon [1970]
         3. whether or not there are any other limitations on the right to rescind.

    * There are five instances where the representee’s right to rescind a contract may be lost. They are where:

         1. a representee has affirmed the contract
         2. restitution is impossible
         3. an innocent third party has acquired an interest in the subject matter of the contract prior to the purported rescission
         4. there has been a lapse of time (that is, delay)
         5. the contract has been executed.

A more controversial issue is whether the court can order a partial rescission:

Vadasz v Pioneer Concrete (SA) Pty Ltd (1995)

- Vadasz executed a guarantee to pay ‘all monies which now or may at any time until we are released be owing’ by his company, Vadipile Drilling, to Pioneer Concrete.
- Vadipile became insolvent, but when Vadasz was sued for $357,427.37 he claimed that the guarantee was unenforceable because it was induced by misrepresentations that it would be with respect to indebtedness on for future supplies by pioneer.
- Judgement was entered for $170,929.32 - Vadasz was entitled to relief in equity by which the guarantee was rescinded as regards past indebtedness.
- The court must look at what was practically just for both parties, and to enforce the guarantee to the extent of future indebtedness was to do no more than hold Vadasz to what he was prepared to undertake independently of any misrepresentation.