1.3 Vitiating Factors (Misrepresentation)

Question 1

What are vitiating factors in contract law?

Answer 1

Factors which can cripple or invalidate the contract they are concerned with, such as: misrepresentation, mistake, duress, undue influence or illegality

Question 2

Define what is meant by misrepresentation?

Answer 2

Misrepresentation is the making of an:

unambiguous false statement of fact or law;

addressed to the representee;

which induces the other party to enter into the contract.

Question 3

What is the result of an actionable misrepresentation?

Answer 3

Actionable misrepresentation: All elements of a misrepresentation are present which means that the contract is voidable.

Voidable: The contract is then still legally binding, but the innocent party has the opportunity to set the contract aside if they wish to do so.

Question 4

How does one test for actionable misrepresentation and what are the elements of misrepresentation?

Answer 4

Has there been a false statement of fact - was the statement substantially true?

Elements present:

1) False statement (oral, in writing or by conduct)
2) Must be fact, not opinion or intention
3) Statement must be made by one party to a contract to the other
4) Statement is one of the factors which induced the party to enter the contract

Question 5

What is NOT a statement of fact?

Answer 5

If the statement is one of intention
If the statement is one of opinion (unless the party has relevant experience and skill)
If it is a statement of law

Question 6

What is the rule with silence and misrepresentation?

Answer 6

Silence is not a misrepresentation. However, if circumstances change, then the innocent
party should be made aware of this change of circumstances.

Question 7

How is actionable misrepresentation determined?

Answer 7

You must demonstrate that the party to whom the statement was made… showed RELIANCE.

The party relied on the statement and was induced to enter into the contract because of it. If reliance cannot be shown, then there is no actionable misrepresentation.

Question 8

Can actionable misrepresentation occur without the innocent party’s knowledge of the statement?

Answer 8

No. If the innocent party never knew of the statement, did not allow it to affect their judgement, or was aware that the statement was untrue, an actionable misrepresentation will not be found.

Question 9

What are the three categories of misrepresentation?

Answer 9

Fraudulent, Negligence, Innocent. Each category has different remedies.

Question 10

How is negligent representation / misstatement determined (ground = common law in tort)?

Answer 10

Negligent misrepresentation is also known as ‘negligent misstatement’ at common law.

Common law in tort - need to display the elements below:

1. [special relationship] that a special relationship existed between the parties
2. [duty of care] that one party owed another a duty of care
3. [breach] that there had been a breach of this duty of care, and
4. [causation] that this breach caused loss which was foreseeable.

Remedies: Rescission and damages (covering all direct loss flowing from the transaction that was induced by the statement, provided it was reasonably foreseeable)

Question 11

What is meant by innocent misrepresentation?

Answer 11

The person making the statement believes that what they are saying is true and has reasonable grounds
for believing the statement is true.

Question 12

What is meant by ‘rescission’ in contract law?

Answer 12

If a contract is rescinded, the contract is ‘set aside’ or ‘avoided.’ Innocent party is not obliged to rescind. May also affirm the contract.

Question 13

When will a right to rescind be lost in a contract? (A.L.R)

Answer 13

1. Affirmation: The innocent party has affirmed the contract, or
2. Lapse of time: There is a lapse of time between discovering the misrepresentation and taking action (as this could be held as evidence of intention to affirm)
3. Restoration is not possible: The parties cannot be restored to their original positions. This may occur if the subject matter of the contract has already been turned from raw material into a finished good, or
   third-party rights have intervened because the subject matter has been sold to somebody else.

Question 14

What are the remedies available for fraudulent misrepresentation, negligent misstatement / misrepresentation?

Answer 14

Damages. Damages will put the claimant in the position they would have been in had the misrepresentation not been made.

Question 15

What are the remedies for innocent misrepresentation?

Answer 15

The usual remedy for innocent
misrepresentation is rescission, but the court has discretion under statute to award damages
in certain cases.

Question 16

How is fraudulent misrepresentation determined?

Answer 16

For fraudulent misrepresentation to be established, there needs to be a false statement made either knowingly (without belief in its truth) or recklessly. The key issue is whether there is an
absence of honest belief.

Question 17

What are the steps to rescission (rescinding a contract?)

Rescission = Restoration

Answer 17

1. The innocent party must notify the other party.
2. Claimant can also apply to the court for a formal order of rescission.
3. This will set the contract aside.

Rescission is intended to set the contract aside (cancel it) and restore the parties to their original position before the contract.

Rescission (equitable remedy) is potentially available for all forms of misrepresentation, whether fraudulent or non-fraudulent, provided it is not barred in either practical or legal terms.

Question 18

What is the difference between an express term and a representation?

Answer 18

A term is part of the contract. If untrue, the innocent party will have a remedy for breach of contract.

A representation is a statement made by one party to the contract, which may have induced the other party to enter into the contract but does not form part of it. If untrue, the innocent party may have a remedy if the statement amounts to a misrepresentation.

Question 19

What processes should be followed for a term and a representation to determine remedies?

Answer 19

Express term of the contract –> assess remedies for breach –> consider damages, the possibility of rejecting goods etc.

Representation –> determine whether it is a misrepresentation –> then consider the appropriate remedies

Question 20

What is a condition?

Answer 20

Major term, going to the root of the contract.

If a term is a condition and the contract has not been fully performed, the innocent party will have the option of terminating the future performance of the contract and obtaining damages for any additional loss suffered.

Question 21

What is a warranty?

Answer 21

A minor, less important term. If the term is a warranty, the innocent party cannot terminate the contract but can sue for damages for loss suffered.

Question 22

What is an innominate term?

Answer 22

Neither a condition nor a warranty.

If the court decides a term is innominate, it looks at the effect of the breach to decide whether the innocent party can terminate the contract.

Test - If the breach deprives an innocent party of substantially the whole benefit of the contract, he can terminate but not otherwise.

Question 23

When can a contract be terminated?

Answer 23

There must be a breach of a condition or a breach of an innominate term which has the effect of depriving the other of substantially the whole benefit he expected to receive under the contract

Question 24

How is negligent representation determined by statute (ground = Misrepresentation Act 1967?)

Answer 24

The claim for negligent representation under statute (Misrepresentation Act) does not require a special relationship and duty of care.

Once the statement is shown to be false, the representor must prove that he had reasonable grounds to make the statement and that he believed that the statement was true up to the time the contract was concluded.

Remedies: recission, damages

Question 25

What are the elements needed for inducement of the representee to enter the contract?

Answer 25

Inducement (M.A.I.A):

The representee must satisfy the 4 conditions below:-

1) [material] The statement must be material;
2) [awareness] The representee must be aware of the statement;
3) [intention] The representator must intend the representee to act on the statement;
4) [action] The representee must act on the statement