Necessary Elements of Negligent Misrepresentation - Case Study Example

BUSINESS LAW ASSIGNMENT Manfredi was persuaded by Elvis Eggplant, a director of HappyHippie Pty Ltd, to purchase a café by projecting a rosy picture of the profits made by that café in the past and its projected profits for the future. A gist of the historical financial data of this café was provided to Manfredi by Eggplant, which was escalated by 60%. These figures were nothing more than a figment of Eggplant’s imagination, and had the sole objective of deceiving Manfredi and making him purchase the café. A careful perusal of items in the café, convinced Manfredi that he had been the victim of a fraud perpetrated upon him by Eggplant, by providing him with falsified and overestimated data regarding the economic condition of the café. During contractual negotiations, several statements regarding facts are made. The objective behind these representations is to form a contract. When these representations do not reflect the truth, they are termed misrepresentations. The law provides a number of legal remedies for misrepresentation. It is left to the discretion of the representee to enforce some or all of these remedies. As such, the enforcement of a particular remedy does not exclude the others.1 The issue of misrepresentation, especially negligent misrepresentation in negotiations and the resulting liabilities in contracts, has been discussed in this work. In this regard, several decided cases were examined for assessing the rights and liabilities of the parties, arising out of the present situation. The representor Elvis Eggplant has made false statements with regard to the past and future cost-effectiveness of Happy Hippy Pty Ltd. Elvis made these statements, in order to induce Manfredi, the representee, to enter into the sale contract. It is to be examined whether Elvis Eggplant had committed the offence of negligent misrepresentation under the provisions of Australian Consumer law. Finally, the rights and remedies available to Manfredi have been specified. Certain representations made in commerce or trade with respect to the supply or prospective supply of services or goods, or with respect to the promotion of such supply, are deemed to contravene the Australian Consumer law. Some of these are; false or misleading representations that the goods are of a specific standard, grade, composition, quality, value, or fit for some particular use; misrepresentations that such services or goods possess approval, accessories, benefits, performance, sponsorship or uses; or misrepresentations regarding the price of services or goods.2 Whenever an individual endowed with a special skill attempts to utilise the same for providing assistance to another person, a duty of care arises. Moreover, a negligent statement that causes economic loss to another, even in the absence of fraud or violation of contractual obligations, fiduciary relationship, statutory requirement, is liable for action. These developments were the outcome of the ruling in Hedley Byrne & Co Ltd v Heller & Partners Ltd.3 In our present case, Elvis Eggplant, made statements aimed at inducing Manfredi to form a contract. That contract caused economic loss to Manfredi, and can be deemed as an act of negligent misrepresentation. Elements for deciding fraud in cases of false statement were discussed in Derry v Peek. 4 In this case, the issue of deciding misrepresentation was discussed clearly. In this case, it was stated that the offence of fraud can be deduced from a representation when it is made with knowledge of fraud or without belief in its truthfulness, or the person making it is negligent regarding its genuineness. An important criterion identified in this case with respect to contractual negotiations, was the element of fraud. In our case, Elvis Eggplant made false representations to Manfredi in order to induce him to enter into the contract. These representations constitute negligent misrepresentation, under the provisions of ACL.5 As such, a misrepresentation is a false statement of law or fact made by a party to another party, which induces the latter to form a contract that produces a loss to the latter. With regard to misrepresentation of law or fact, an action can be made. Misrepresentation is of the following types. First, fraudulent misrepresentation or the making of a false representation intentionally, recklessly as to its veracity or without believing it to be true.6 Second, negligent misrepresentation or making a representation carelessly and in breach of the duty owed to the party to whom it is made. In the absence of a special relationship between the parties, a misrepresentation could be presumed. However, the statement in question should have been made without reasonable cause to believe it to be true or in a careless manner. Finally, innocent misrepresentation, wherein the representation made is not negligent or fraudulent.7 The second element in the concept of misrepresentation is reliance on the representation. For example in Mutual Life and Citizens’ Assurance Co Ltd v Evatt, the High Court of Australia ruled that a duty of care was owed by individuals who provided advice in critical concerns. In addition, for claiming fraud, a person has to prove reliance on the representation. An appeal was lodged against this decision at the English Privy Council, which set aside the High Court’s decision.8 Subsequently, Australia was no longer constrained to accept the rulings of the English Privy Council. Thus, the above ruling was re-examined by the High Court of Australia in Shaddock & Associates Pty Ltd v Parramatta City Council (No 1).9 The decision in the Evatt case was reinstated and contemporary tests for negligent misstatement were established. However, in San Sebastian Pty Ltd v Minister administering the Environmental Planning and Assessment Act 1979,10 the High Court ruled that liability was not restricted to those in possession of competence or special skill. Reliance is of considerable significance, with regard to economic loss resulting from negligent misstatement. 11 In this context, reliance is very important for establishing a relationship of proximity in ascertaining a duty of care towards the plaintiff on the part of the defendant. In our problem Elvis Eggplant made false statements by inflating the profitability of the café. Since, he knew that Manfredi would rely on his representation and act upon it, Eggplant should have been very careful about the truthfulness of his statement regarding the profits of the café. Elvis made a representation to Manfredi, with full knowledge that the latter would enter into business transactions with him. As such, Eggplant had breached his duty of care towards Manfredi. Moreover, in Evatt the Privy Council opined that a special relationship emerged only when the party providing the advice was engaged in the business of providing advice. Furthermore, such party had to proclaim the possession of competence and skill in the area where it was providing advice. Furthermore, in Shaddock v Parramatta City Council, the court held that the party providing information to another party, with the awareness that the latter would rely upon it was under a duty to undertake reasonable care to ensure the veracity of such information. As such, the case law tends to project the necessity for the representor to intend his misrepresentation to be acted upon. This was also illustrated in the ruling in Commercial Banking Co of Sydney Ltd v RH Brown & Co.12 In Vimig Pty Ltd v Contract Tooling Pty Ltd, the court held that the contract could not be rescinded on ground of the misrepresentation that had been made innocently.13 This position was made very clear in the ruling in Armstrong v Jackson, 14 wherein it was held that rescission could be granted only upon establishing fraud.15 In our case, Elvis Eggplant made a statement with regard to the company, in a negligent manner. In this regard, the Trade Practices Act 1974 and the Fair Trading Act 1987 provide protection to corporations and non-corporate traders, respectively. Section 52(1) of the Trade Practices Act declares that in trade or commerce, no corporation can undertake conduct that is deceptive, misleading, or can deceive or mislead. With regard to innocent, false or misleading representations, the Australian Consumer Law provides an action for damages. These remedies become effective when there is a tendency or capacity to mislead. Damages can be recovered from the representor by the representee, if the latter can establish that he had formed the contract with the representor; the representor had made a misrepresentation to him, prior to forming the contract; the representee had undergone a loss due to the contract; and that the representor would have been liable to pay him damages if he had acted fraudulently.16 This work identified the necessary elements of negligent misrepresentation and applied them to the present situation. In our problem, Elvis Eggplant being the director of the café, made untrue and negligent statements, so as to cause Manfredi to form the sale contract. Knowing that Manfredi would rely on his advice, he acted negligently to induce him to form the sale agreement. Thus, Elvis Eggplant had engaged in negligent misconduct, as can be deduced from the above discussion and case law. The law provides rescission of the contract or damages for misrepresentation. With regard to negligent misrepresentation, the claimant can claim damages and rescission of the contract. Thus, Manfredi can rescind the contract and claim damages for fraud and breach of contract, according to the relevant legislation and decided cases. BIBLIOGRAPHY A Articles/Books/Reports Cartwright, John, Misrepresentation, Mistake and Non-disclosure (Sweet & Maxwell, 2012) Gillies, Peter, Concise Contract Law (Federation Press, 1988) Hocking, Barbara Ann, Liability for Negligent Words (Federation Press, 1999) Latimer, Paul, Australian Business Law 2012 (CCH Australia Limited, 2012) B Cases Armstrong v Jackson [1917] 2 KB 822 Australian Competition and Consumer Commission v Telstra Corporation Limited [2007] FCA 1904 Commercial Banking Co of Sydney Ltd v RH Brown & Co (1972) 126 CLR 337 Derry v Peek [1889] 5 TLR 625 Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465 Mutual Life and Citizens’ Assurance Co Ltd v Evatt (1970) 122 CLR 628 San Sebastian Pty Ltd v Minister administering the Environmental Planning and Assessment Act 1979 (1986) 162 CLR 340 Shaddock & Associates Pty Ltd v Parramatta City Council (No 1) (1981) 150 CLR 225 Vimig Pty Ltd v Contract Tooling Pty Ltd (1987) 9 NWSLR 731 C Legislation Competition and Consumer Act 2010 (Cth) Fair Trading Act 1987 (SA) Trade Practices Act 1974 (Cth) D Other Law Handbook, Australian consumer law (2014) Misrepresentation Utz, Clayton, The Australian Consumer Law Read More