CONTRACT LAW B: LECTURE 1 Vitiating Factors Examples - Even when a contract has been validly formed, in certain situations

the contract may be avoided or set aside these are known as vitiating factors - Categories - Bill induces Anna into a contract through misrepresentation, the law justifies intervening (setting aside a contract) when one party has acted improperly situation 2 Annas consent was impaired in someway, e.g. acted on the wrong information, she made a mistake which is difficult to set aside unless consent is missing Bill takes unfair advantage over Anna frustration due to some external event contract cannot be performed, courts are quite reluctant to set aside contract due to frustration Misrepresentation - There is a clear distinction between a representation and a promise a representation does not create a contract, thought it may create a liability in fraud and deceit, negligence gives rise to a claim in damages - and it allows a contract to be set aside if it is induced by a misrepresentation damages in the law of contract are not available except in one case where the misrepresentation has been incorporated into the contract as a term - However a misrepresentation can be included as a term of the main contract or it may exist in the collateral contract (courts are very reluctant to find collateral warranties - Promise a statement by which the maker of the promise accepts an obligation to do or not to do a thing, basis of contract, generates expectation and creates a contract, the law ensures people stick to their promises remedies available when they do not act - Representation does not create a contract but may affect a contract, is a statement of fact which induces the other part to enter into a contract or others act to their detriment (estoppel) representor does not promise anything but merely represents that the statement they make is true key remedy for misrepresentation is rescission (putting aside) - Must ask is the statement without legal effect? If it is then it will not be a term and will not justify rescission or damages in the law of tort, this is known as a mere puff - Dimmock v. Hallett (1866) LR 2 Ch App 21: Concerned a contract to convey farmland, land described by owner as fertile and improvable, contract was concluded and the land turned out to be not in good condition. Purchaser alleged that this was a misrepresentation, the court held that fertile and improvable was merely a puff and had no legal effect - Carlill v. Carbolic Smoke Ball [1892] 2 QB 484: statement of payment of $100 reward was a term of the contract and was not a mere puff because it was precises and specific - Mitchell v. Valherie [2005] SASC 350: Real estate ad stated that there was nothing to spend on the property because it was a perfect presentation and immaculate style. However the foundations of the house were indeed weak, the plaintiff had to spend money repairing the foundations. Defendant argued that their statements on the ads were mere puffs and not misrepresentations, HELD: Supreme Court of South Australia held that

immaculate style was indeed a puff, however the statement nothing to spend was specific enough and thus amounted to a misrepresentation - Sulan J: When deciding whether or not a statement is a mere puff, one has to take into account the audience that the statement is addressed to e.g. if the purchasers had been sophisticated investors, it would be possible to accept that all the statements in the ads were mere puffs and promotional - Innocent misrepresentation does not amount to damages, however it can amount to damages if it is a term of the contract Terms and Misrepresentations - Couchman v. Hill [1947] KB 554: Concerned the sale of a pregnant cow, no warranty was given as to its condition at the auction, the claimant asked the seller (defendant) whether the heifer was in calf, and made known of the fact that he didnt want to buy it if it was indeed pregnant, the seller assured him that it was not, which turned out to be false - Plaintiff argued that the statement made by the seller was a term of the contract: Court of Appeal held his argument - Dick Bentley Productions Ltd v. Harold Smith (Motors) Ltd [1965] 1 WLR 623: Seller of the car was a dealer, the buyer of the car was not. Statement made by seller about the cars millage, proved to be untrue, it was actually much higher than claimed. Was the statement a term of the contract? - It was said that the seller was in a better position to know wether the statement was true or not. Must ask, 1) how important is it to the representee, 2) is the person making the statement in a better position to know whether the statement is true or not - Ecay v. Godfrey (1947) 80 LI LR 286: Where a statement is made, and the person making it, asks the other to verify wether it is true or not, it will not be treated as a term e.g. seller asks buyer to verify the mileage Collateral warranties - JJ Savage & Sons Pty Ltd v. Blakney (1970) 119 CLR 435: Whether or not the person making the statement intended to guarantee the truth of the statement must determine this by the facts of the case What is a misrepresentation? - It can be made by conduct as well as by words - Jones v. Dumbrell [1981] VR 199: A representation was made that was originally true, facts changed and the original representation became false. The representor did not disclose and negotiations continued and were concluded. HELD: To be an actionable misrepresentation by their conduct they didnt disclose that the statement had become false - Gordon v. Selico (1986) 798 EG 53: The vendor of a house covered up some dry rot, didnt say anything about it. HELD: His actions of covering up the dry rot is a misrepresentation - Can a representation be made by silence? The general rule is that where parties enter into a contract, there is no requirement or duty to disclose material facts due to the difficulty of deciding when the duty will apply - Exceptions: 1) Silence by the representor makes the statement only partially true - Dimmock v. Hallett (1866) LR 2 Ch App 21: a statement by the vendor of an estate, represented that the farms were fully let, which made the

estate more valuable to the purchaser, the seller omitted to disclose that one of the tenants had given notice to quit, therefore it was partially true With v. OFlanagan [1936] Ch 575: Involved the sale of a medical practice, practice worth 2000 pounds at the beginning of negotiations, doctor (seller) becomes ill, by the end of the sale the practice was worthless as there was no patients, circumstances had changed and the silence by not saying all the patients had gone was a misrepresentation 2) Insurance Contracts: There is a duty of disclosure on the person being insured otherwise they will be liable for misrepresentation- Insurance Contracts Act 1984 (Cth) s 21: 3) Contract of guarantee: e.g. debt guarantee where one must disclose circumstances that are not obvious in relation to your debt Partially true statements: Krakowski v. Eurolynx Properties Ltd (1995) 183 CLR 563: Court applies an objective test of reasonability to determine the meaning of an ambiguous statement A statement that does not accord with true events past or present intention is irrelevant and one can make a false statement entirely innocently In order to be actionable a misrepresentation must be: A misrepresentation of fact. Statement of intention one party intends something to occur in the future, it makes misrepresentation much wider general rule is that no statement of intention is actionable unless the court presents it as a statement of fact Edgington v. Fitzmaurice (1885) 29 Ch D 459: This case involved a company fraud leading to a misrepresentation Courts ague that when one makes a representation of intention which is a statement of their present intention then that is a statement of fact and not a statement of intention Ritter v. North Side Enterprises Pty Ltd (1975) 132 CLR 301: Its our intention that their will be sanitation within four months on the property was held to be a statement of fact because it was held to be their current intention Statements of opinion are not generally actionable but there are exceptions Bisset v. Wilkinson [1927] AC 177: A vendor of a farm in NZ which had never been used before for sheep represented that the farm could support 2000 sheep, which turned out not to be true. Privy Council held that this was a statement of opinion and because it was honestly held there was no misrepresentation Smith v. Land & House Property Corp. (1884) 28 Ch D 7: LJ Bowen A statement by one who knows the facts best is a statement of fact because its an assertion that facts support his opinion Statements of law are not generally actionable unless fraudulent - Public Trustee v. Taylor [1978] VR 289 David Securities v. Commonwealth Bank of Australia (1992) 175 CLR 353: Unjust Enrichment: You can now recover a payment made under a mistake of law, but a statement of law isnt an actionable misrepresentation 1) Requirements for Misrepresentation: The statement must be a statement of fact, or a statement of intention presented as a statement of fact, or it has to be a statement of opinion presented as a statement of fact

2) The misrepresentation must be addressed to the party that is misled What about where its passed to the party misled by a third party? Its only actionable if the person making the statement intends it will be passed to the third party otherwise liability will be unlimited 3) The statement of fact must be material: This filters out any trivial statements, what the court are asking is would the statement have objectively influenced a reasonable person to enter into the contract, fraud is an exception, and whether it would influence someone becomes irrelevant, it in most cases it is easier to show fraud in order to recover The link question to materiality, although theoretically separate is does the statement induce the contract, the idea is that there could be various reasons why people enter into a contract and not just the misrepresentation, but it must be a reason for entering into a contract What situations isnt the misrepresentation a reason for entering into the contract? Redgrave v. Hurd (1881) 20 Ch D 1 gives 3 examples 1) One party makes a representation and the other party is unaware of it, therefore it cannot influence the party to enter into the contract 2) One party makes a statement and the other party is well aware that the statement is false, therefore there is no influence 3) One party enters into a contract entirely for other reasons and the statement made by other party is no inducement whatsoever How do you prove inducement? *Gould v. Vaggelas (1984) 157 CLR 215 is the leading authority for this The basic requirements of an actionable misrepresentation: 1) it is a misrepresentation of fact, 2) it is made to the party being misled 3) it is material objective test, whether it actually induced the contract 3 Types of Misrepresentation: Fraudulent, negligent and innocent, its very important to discern between the three, only if the misrepresentation is fraudulent or negligent can one recover damages in the torts of deceit and negligence, where the misrepresentation is innocent the only remedy is rescission: Courts take a hard-line approach when its comes to fraud, both in terms of the damages that they will award and in terms of what has to be proved i.e. in relation the inducement etc. however one must establish fraud in the first place and the threshold for establishing fraud is rather high Definition of Fraud: Derry v. Peak (1889) 12 App Cas 337: A statement is fraudulent in three situations, 1) A statement that is false made by one party who knows that it is false is fraud, 2) One party makes a statement without believing it to be true, its not that the statement is false, the party simply doesnt believe it to be true but makes it anyway, 3) One party makes a statement recklessly careless of whether it was true or false, this is the broadest of the three situations If the misrepresentation falls within these categories, and in particular the third category then that party can be fraudulent without intending to deceive but be fraudulent by being reckless rather than by acting unreasonably Derry v. Peak (1889) 12 App Cas 337: A company prospectus said that the company was entitled to use steam power when running its trams, in order to run a steam power tram one needed permission, however the company

was unaware of the requirement of permission and they honestly believed it was entitled to run the steam power trams and were setting up a company for that purpose and were seeking investors, it was disastrous for the investors because they entered into a contract to buy shares in the company and the permission was then refused to run steam powered trams HELD: On the facts it was said that the defendant was not fraudulent as they honestly believed that they were entitled to run steam powered trams so they didnt know the statement was false, they believed it to be true and were not recklessly careless NOTE: Krakowski v. Eurolynx Properties Ltd (1995) 183: Emphasised that a person can be fraudulent without any deceitful motive, therefore motive in this context is irrelevant if a party falls within one of the categories of fraud NEGLIGENT MISTATMENT: Hedley Byrne v. Heller [1964] AC 465: Said that there was liability for negligent misstatement this was an expansionist decision it is not clear when liability is imposed, however where the parties are in a contract, the court holds that there is the concept of assumption of responsibility which imposes a duty of care, although when this duty is imposed is not entirely clear DUTY OF CARE: Esanda Finance v. Peat Marwick Hugerfords (1997) 188 CLR 241: There is some discussion of when a duty of care arises, revolving around the concepts of proximity and reliance, if the parties are in a contractual relationship then establishing proximity and reliance shouldnt be difficult RESCISSION FOR MISREPRESENTATION: Rescission is not confined to misrepresentation. It is also available in cases of duress, undue influence, unconscionable dealing, and mistake. Rescission is available for all sorts of misrepresentation including innocent misrepresentation.1) If a misrepresentation has occurred then the misrepresentee has to elect to rescind the contract because rescission isnt automatic 2) Election must take place within a reasonable time and 3) must be communicated to the representor, see Ivanof v. Phillip Levy [1971] VR 167; Car Financing Ltd v. Caldwell [1965] 1 QB 525 BARS TO RESCISSION: The first obvious thing is that it does not take place automatically and the party must elect to rescind the contract o Affirmation: If the represontor does not want the contract set aside they could argue that the other parities behaviour has affirmed the contract rather then acting to rescind the contract However affirmation needs certain knowledge, and the party must know in law that they have a right to rescind, so it is not merely that certain facts are false which would give a right to rescind, in other words the courts are keen to do is to block the obvious argument from people making a misstatement while the other parties affirmed the contract so it cant be set aside o LAPSE OF TIME: If the party waits and fails to elect then that stops them from electing to rescind it is not wholly clear what period of time or how this exception works as there is contradictory authority o RESTITUTION IMPOSSIBLE: This is much more important then the other two bars on rescission, the purpose of rescission is to put the

parties in the position they were at before they entered into the contract, if it is not possible to return people to the way they were then rescission cannot be used however in Alati v. Kruger (1955) 94 CLR 216 it was held that the rescission does not have to be perfect, i.e. the courts do not have to exactly restore the parties to their original position before the contract was entered into, this is because equity intervenes o THIRD PARTY RIGHTS: Parties enter into a contract and one party argues that there was a misrepresentation e.g. one party sells a care to the other party and that party sells the car to a third party, then wishes set the contract aside, if the third party has bought the car for valuable consideration then rescission is impossible, in other words third parties are protected o EXECUTION OF THE CONTRACT: If the contract has been fully executed then there can be no rescission this is a bit complicated because of various state statutes, essentially the old rule was that where there is a contract for sale of land and there has been a misrepresentation then the contract cannot be rescinded (Wild and Gibbs) Subsequently in England this rule was extended to cases that dont concern land - there is contradictory authority in England and Australia on this Dominc OSullivan describes it as uncertain, but there are Australian cases that say where the contract doesnt concern land that the fact the contract is executed doesnt mean it cant be rescinded - Leason Pty v. Princes Farm Pty. [1983] 2 NSWLR 381 Many states have removed this bar through statute, both in cases that concern land and those that dont concern land it is unclear in QLD because there is no statute, however it is clear that the contract can always be rescinded whether it is land, whether its not land, even if its executed where the misrepresentation is fraudulent, in cases of innocent and negligent misrepresentation, where the contract is complete, then there can still be rescission if its fraudulent *All these bars on rescission are not confined to misrepresentation and there can be rescission in other contexts e.g. duress, undue influence etc. Non actionable misrepresentations are known as mere puffs which are simply marketing gimmicks whereas actionable misrepresentations are either incorporated as terms into the contract, or they are actionable as a tort of deceit or negligence, or they give rise to the remedy of rescission even if the misrepresentation is innocent DAMAGES FOR MISREPRESENTATION: the only misrepresentations that give rise to damages are those that are negligent or deceitful - damages for deceit are often quite broad - Toteff v. Antonas (1952) 87 CLR 647: Said that damages in the tort of deceit can be awarded for all of those loses that flow directly from the deceit, its not that the damages need to be reasonably foreseeable the test is much broader, it is loses that flow directly from the deceit i.e. any consequential loss that flows directly form the deceit can be recovered in the tort of deceit A good illustration of this is: Professional

Services of Australia Pty Ltd v. Computer Accounting & Tax Pty Ltd (2009) 261 ALR 179: In this case the basis of the damages was because the parties entered into a contract as a result of the deceit, the parties missed out on alternative investment opportunities i.e. an importunity was lost, according to this case damages could be awarded on the basis that an opportunity was lost, in other words the money that they would have made by investing elsewhere which they failed to make because of the deceitful contract could be recovered - Archer v. Brown [1984] 2 All ER 267: Depicts how wide damages are in this context in this case the plaintiff entered into a contract with the defendant as a result of a deceit which effectively caused serious financial damage to the plaintiffs business, as a result they were forced to take out a bank loan in which they had to pay interest HELD: That the interest from the bank loan could be recovered therefore anything that flows directly from the deceitful contract can be recovered in the tort of deceit DAMAGES FOR NEGLIGENT MISSTATEMENT: Kenny & Good Pty Ltd v. MGICA (1992) Ltd (1999) 199 CLR 413: Involved an overvaluation of a property where as a result the bank lent more than the property was worth and thus took out insurance on the basis of that over valuation to cover the value of the security as the bank was worried about the property being sold less than the value of the security - Due to the negligent misstatement, the value of the property was lower than the value of the insurance - The borrower defaulted, the bank sold the property and the insurance company was liable to the bank for the initial value of the property i.e. what the negligent valuer said the property was worth HELD: The amount that the insurance company could recover was the full amount that had been paid out under the insurance policy i.e. not simply the difference between the real value and the negligent value the courts justification was that the insurer would not have lent out the money otherwise - Damages in these kind of situations are potentially quite broad as the overarching principle is putting the party in the position they would have been in if the tort had not occurred in making this valuation the court took into account a range of consequential loses that flowed from the deceit ** Damages are assessed quite generously, particularly for deceitful conduct it is possible to exclude liability for all types of misrepresentation (innocent and negligent) other then deceitful ones it is never possible to exclude liability for fraudulent misrepresentation *** Must check problem questions for exclusion clauses i.e. that the basis of the claim isnt deceit