The Impact of Misleading and Deceptive Conduct

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THE IMPACT OF MISLEADING AND DECEPTIVE CONDUCT

ON CONTRACTS FOR THE SALE OF LAND

by Stephen Climpson, Barrister

1. In this paper, I will cover the following topics:

(a) An overview of the general law in relation to misrepresentations made in connection with the sale of land and remedies that may flow from such conduct;

(b) An overview of the statutory law relating to misleading or deceptive conduct in connection with the sale of land and the remedies that flow from such conduct;

(c) The impact of provisions in the Law Society standard Contract for the sale of land (2005 ed.) where there has been misleading and deceptive conduct;

(d) Two recent decisions that dealt with the impact of misleading and deceptive conduct on contracts for the sale of land.

I General Law

2. Where a statement is made by one person to induce another to enter into a contract, the statement may take effect as a term of the contract or as a collateral contract. Alternatively, it may, as a false inducement to enter into the contract, give rise to rights and remedies even though not effective as a term of the contract. This distinction may be expressed as between a “warranty” (which is enforceable as a legally binding promise) and a “mere representation” which may be actionable (although not as a term of the contract).

3. A misrepresentation may be defined as a false statement of a material fact made by one party (the representor) to another (the representee) to induce that other party to enter into the contract and which has this effect.[1] The misrepresentation does not prevent the contract coming into being, or render the contract void. Instead, the contract is voidable and the principal response of the general law to this misinformation is to say that, because the representee’s decision to contract was based on a false understanding, the representee should be permitted to resile from the contract. In this respect, rescission has been described as the usual remedy for misrepresentation.[2]

4. Rescission may be described as the reversal of a transaction so that each party is restored to their original position and the contract is treated as though it was never made.

5. Traditionally, there was an important difference between common law rescission and equitable rescission. Common law rescission was only available where there has been a fraudulent misrepresentation. Equitable rescission was also available when the misrepresentation was innocent, equity holding that it would be unconscionable for the representor to hold the representee to the bargain.

6. The approach of equity, which now prevails, is that the representor, notwithstanding the absence of moral delinquency, is not allowed to enforce a contract against the representee who is permitted to rescind the contract ab initio, provided the parties can be restored substantially to their pre-contractual positions.[3]

7. For rescission to be available at general law, one of the parties to the agreement must elect to rescind the contract. In Alati v Kruger (1955) 94 CLR 216 at 224, the High Court said:

“Rescission for misrepresentation is always the act of the party himself… The function of a court in which proceedings for rescission are taken is to adjudicate upon the validity of a purported disaffirmance as an act avoiding the transaction ab initio, and if it is valid, to give effect to it and make appropriate consequential orders.”

8. Further, when a contract is rescinded, the law recognises that, if the contract is to be treated as though it was never made, each party must be able to get back what they have given under the contract in return for what they have been given. In other words, the parties must be able to be, at the very least, substantially restored to their respective pre-contractual positions. This is known as the requirement of restitutio in integrum.

9. Without these three conditions of misrepresentation of a material fact; an election to rescind the contract and the availability of restitutio in integrum, a court will not make an order to rescinding a contract under general law.

10. Apart from rescission, a purchaser has a right to damages from the vendor at common law if there has been fraudulent misrepresentations. At common law, a purchaser may also be entitled to damages for negligent misrepresentation. The position at general law is still that damages are not available for a misrepresentation that is innocent, that is, neither fraudulent nor negligent.[4]

11. Apart from the remedies of rescission or damages, a purchaser may also be entitled to the equitable remedy known as relief against forfeiture if the vendor has made representations such as to make it unconscionable for the vendor to rely on a breach by the purchaser of an essential term of the contract to rescind and claim forfeiture of the deposit. Relief against forfeiture was the subject of High Court authority in Tanwar Enterprises Pty Limited v Couchi (2003) 217 CLR 315 and Pentagold Investments Pty Limited v Raminos (2003) 217 CLR 367.[5]

II Overview of the statutory law relating to misleading and deceptive conduct

(a) Overview of the statutory provisions

12. The Trade Practices Act (“TPA”) and the Fair Trading Act (“FTA”) are the primary sources of statute law relating to misleading and deceptive conduct concerning contracts for the sale of land.

13. Apart from the TPA and the FTA, there are provisions in the Conveyancing Act which are also relevant when considering remedies for misrepresentations in connection with contracts for the sale of land.

(i) The prohibition

14. Under s.52 TPA, there is a general prohibition that corporations must not, in trade or commerce, engage in conduct that is misleading or deceptive or likely to mislead or deceive. Section 42 FTA provides a similar prohibition against “persons”.

15. Section 53A TPA (and the equivalent provision in s.45 FTA) contains specific provisions relating to false representations concerning land including that a corporation (or persons under the FTA) shall not, in trade or commerce, in connection with the sale or possible sale of an interest in land, make a false or misleading representation concerning the nature of the interest in the land, the characteristics of the land, the use to which the land is capable of being put or the availability of facilities associated with the land.

16. Other potentially relevant provisions in the TPA include s.51A (and the equivalent provision in s.41 FTA) which is to the effect that where a representation in relation to a future matter is made, and there is no reasonable grounds for making the representation, the representation is taken to be misleading. In this regard, the section also provides that, where representations concerning future matters have been made, the maker will be deemed not to have reasonable grounds unless it adduces evidence to the contrary.

(ii) The remedies

17. Remedies for misleading conduct under the Trade Practices Act (and the equivalent provisions of the FTA) fall essentially under two sections.

18. Section 82 of the TPA (and the equivalent provision in s.68 FTA) provides that a person who suffers loss or damage by the conduct of another person in contravention of a provision of the relevant parts of the Act, may recover the amount of the loss or damage by action against the other person or against any person involved in the contravention.

19. The second remedial section is s.87 of the TPA (and the equivalent provision in s.72 FTA).

20. Section 87(1) gives the Court a general power to make orders where a party has suffered or is likely to suffer loss by the conduct of another person engaged in contravention of a relevant provision of the TPA. The court can make any orders it thinks appropriate in order to compensate the person suffering loss in whole or in part for the damage or to prevent or reduce the loss or damage. The court’s power to make “any orders it thinks are appropriate” includes any of the orders referred to in s.87(2). It has been observed that this section provides a “remedial smorgasbord”.[6] The critical provisions relating to rescission are s.87(2)(a) and (ba).

21. Under s.87(2)(a), the court may make an order declaring the whole or any part of a contract made between the person who suffered, or is likely to suffer, the loss or damage and the person who has engaged in the conduct, or a person who was involved in the contravention constituted by the conduct, to have been void ab initio or at all times on or after such date as is specified in the order.

22. Under s.87(2)(ba), the court can make an order refusing to enforce any or all of the provisions of such a contract. If the court chooses to refuse to enforce all of the provisions of such a contract, this is a remedy very much like rescission.

23. Apart from ss.82 and 87 TPA, the Court also has power to grant injunctive relief under s.81 (and the equivalent provision in s.61 FTA).

24. It is important to remember that ss.82 and 87 TPA (and the equivalent FTA provisions) provide that damages and other relief may be awarded not only against those persons who engage in the misleading and deceptive conduct but also those who were “involved in the contravention”. Section 75B TPA (and the equivalent s.61 FTA) provides that a person “involved in a contravention” is a person who has aided or abetted or procured the contravention; has induced the contravention or has, in any way, directly or indirectly been knowingly concerned in or a party to the contravention. Those provisions have particular significance in relation to circumstances where the vendor in the transaction is a company and relief is needed against those who stand behind the company or where there have been other parties who have participated or assisted the vendor in the relevant conduct. However, it is important to bear in mind that a person will not be held to have been involved in a contravention unless it is established that that person was aware or should have been aware of the facts that gave rise to the contravention and intentionally participated in the contravention (see Yorke v Lucas (1985) 158 CLR 661 at 666-669 and Quinlivan v ACCC (2004) ATPR 40-010). It is unnecessary to prove that the respondent knew that his or her participation was a breach of the Act. All this is required is actual knowledge of the essential elements of the contravention and intentional participation in it.

25. In relation to the conduct of a body corporate, it is also valuable to keep in mind s.84 TPA (and the equivalent provision in s.70 FTA) which deems that any conduct engaged in on behalf of a body corporate by a director, servant or agent of the body corporate within the scope of that person’s actual or apparent authority is deemed to have been engaged in also by the body corporate.

(iii) Provisions apportioning responsibility

26. Under s.82(1B) TPA, if a plaintiff has made a claim in relation to economic loss or damage to property caused by conduct in contravention of s.52 and the plaintiff has suffered loss or damage partly as a result of the plaintiff’s own failure to take reasonable care and as a result of the defendant’s conduct in contravention, the damages that the plaintiff may recover are to be reduced to the extent that the court thinks “just and equitable” having regard to the plaintiff’s share of responsibility for the loss or damage. A proviso to the operation of the section is that the defendant did not intend to cause the loss or damage or did not fraudulently cause the loss or damage. The provision only applies to causes of action that arose on or after 26 July 2004 (see AFP Properties Pty Limited v Kestrel Holdings (No. 2) Pty Limited [2007] FCA 1561 at [366]-[367]). The section may be said to be analogous to a limited form of contributory negligence.

27. Part VIA TPA provides for proportionate liability for misleading and deceptive conduct. As with s.82(1B), that part of the Act only applies to causes of action arising on or after 26 July 2004. The provisions in Part VIA TPA may be said to be analogous to rights of contribution where there are two or more parties whose acts or omissions caused the damage or loss that is the subject of the claim. However, there is the significant difference that, where there are such “concurrent wrongdoers”, the damages award to which a plaintiff is entitled will be limited as against each wrongdoer to the proportion of the damage or loss which the court assesses as being that defendant’s responsibility for such damage or loss.

28. The purpose of a similar provision in the Civil Liability Act (which applies to the operation of the FTA and is referred to hereunder) was explained by Palmer J in Yates v Mobile Marine Repairs Pty Limited [2007] NSWSC 1463 at [93]-[94] as follows:

“The object of Part IV Civil Liability Act[7] is remedial and it dramatically changes the previous law. Formerly, a plaintiff could choose to sue only one of several wrongdoers who caused the same loss and the court could enter judgment for the whole of that loss against that defendant. Even if the defendant cross-claimed in the proceedings for indemnity or contribution against the other wrongdoers, the plaintiff could enforce a judgment against the defendant alone for the whole of the loss, leaving the defendant to recover from the cross-defendants, if it could. Sometimes a defendant obtains judgment against a cross-defendant but could not recover the judgment because of the cross-defendants’ insolvency.

“Part IV is designed to alleviate this perceived injustice. It is intended to visit on each concurrent wrongdoer only that amount of liability which the Court considers “just” having regard to the comparative responsibility of all wrongdoers for the plaintiff’s loss.”