Australian Business Law, Fraudulent Misrepresentation - Case Study Example

Fraudulent Misrepresentation Institution Date Introduction Fraudulent misrepresentation is a state where a person makes an intentional and false statement to induce someone to enter into a contract or business dealing. Courts rescind contracts entered into as a result of fraudulent misrepresentation. Fraudulent misrepresentation is a tort and sometimes it can be converted to reckless misrepresentation. In both common and statute law, misrepresentation is an offence and courts condemn the action of inducing parties to enter into contracts through misleading or false misrepresentation. A trader or consumer who knowingly makes a misrepresentation about something offered for trade or commerce is found guilty of fraudulent misrepresentation. Issue Is Mr. Spoke liable for fraudulent the misrepresentations he made regarding the past and future profitability of the store? Law In the landmark case, of Derry v Peek (1889) 5 T.L.R. 625, the concept of fraudulent misrepresentation was introduced1. According to the case, fraudulent misrepresentation is defined as situation where a representation is made knowingly, or without belief in its truth, or recklessly, careless whether it is false or true. A person who makes a representation with knowledge that is false is liable for fraudulent misrepresentation2. However, the motive of false misrepresentation is regarded as immaterial and a person is held liable even though they were not intent on deceiving the other party. Deek v Perry established five elements that have to be established in finding a party liable for fraudulent misrepresentation3: 1. A misrepresentation of fact: the offending misrepresentation must be either oral, written or by conduct. One cannot be found guilty of fraudulent misrepresentation because of passive failure to disclose the truth. 2. Knowledge of falsehood: The person making the statement is aware that the representation is false, or is indifferent to the falsity. 3. Intended Reliance: The person making the representation must have the motive of inducing the other party to rely on the representation 4. Actual reliance by plaintiff: The misrepresentation must have been relied upon by the plaintiff to make a decision that is detrimental. It is immaterial on whether the representee knows of the falsity or whether he was able to check the accuracy of the representation. 5. Damage: the plaintiff must have suffered some loss or damage as result if the fraudulent misrepresentation. Under statute law, false representation is an offence as section 18 of the Australian Consumer Law (ACL) or the Competition and Consumer Act 2010 (Cth) prohibits Misleading or deceptive conduct. Section 18 asserts that: “A person must not, in trade or commerce, engage in conduct that is misleading or deceptive or is likely to mislead or deceive” 4. Most commercial activity including sale of businesses is captured by the provision of Section 18 of the Australian consumer law. Analysis Bob can easily prove a case of fraudulent misrepresentation against Mr. Spoke as all the elements of the tort are present in the situation. Bob’s first task would be proving the first element of fraudulent misrepresentation; misrepresentation of facts. According to Derry v Peek, the misrepresentation at the centre of a fraudulent misrepresentation action must either be written, oral or implied by conduct5. In this case, the misrepresentation was written as Mr. Spoke presented historical accounts of his stores performance that were inflated by 55 per cent. According to Fitzpatrick v Michel (1928) NSWStRp 19, misrepresentation is based on statements that are capable of being found true or untrue at the time of their making6. In this case, the representation was a falsity that Mr. Spoke’s bicycle business figures were 55 per cent higher than their actual figures. Secondly, Bob has to prove the second element of fraudulent misrepresentation which involves showing that Mr. Spoke knowingly misrepresented his shop’s historical figures. Having run and owned the store for years, it is clear that Mr. Spoke knew about its true performance. The facts of the case say Mr. Spoke inflated the figure of the shop’s historical performance in the hope of inducing Bob to purchase the store on the basis of its attractive performance. In Commercial Bank Co of Sydney v RH Brown and Co (1972) 126 CLR 337, a bank was found guilty of fraudulent misrepresentation as it presented false information about a client financial viability7. Although, the bank had known the client was not viable it went ahead to represent that their client was viable. In Derry vs Peek, the shareholders case failed as they could not prove the director lacked honest belief that his statement was untrue8. Thirdly, Bob has to prove that Mr. Spoke made the representation with the intention of inducing him to rely on it to agree to the sale of the Bicycle business. Proving this element is also easy as the representation shows that Mr. Spoke’s inflation of historical figures was an attempt to make the business look more attractive than it was. Similarly, in CBC vs Brown, the court found that the plaintiff had sought information from the bank so he could rely on it to make a decision on whether to supply wool to the bank’s client on credit9. One of the most important elements in proving fraudulent misrepresentation is proving that the plaintiff relied on the misstatement to make a detrimental decision. Bob was very angry with Mr. Spoke when he found documents which proved the shop’s historical figures were not as high as he had been made to believe. Similarly, Brown Woolgrowers relied on a misrepresentation by the bank that’s its client was financially viable10. Brown woolgrowers went ahead and supplied the purchaser with the wool relying on the bank assurance of his viability. In Derry vs Peek, The plaintiff had relied on a prospectus from the defendant who wanted to incorporate a company that would have the right to use mechanical or steam power. Although, the overall case failed, the plaintiff was able to show that he relied on the representation the company would use mechanical or steam power to purchase shares in the company. The last element that has to be proved for an action of fraudulent misrepresentation to succeed is whether the plaintiff suffered damage as result of relying on the deceit or fraud by the defendant. In Bob’s case he can prove damage as he purchased a shop that was not worth as much as he had anticipated. Bob had intended to buy a shop whose historical figures were 55 per cent higher than the shop he bought from Mr. Spoke. Similarly, in CBC v Brown, the plaintiff suffered a loss as the purchaser of wool was unable to pay for the wool delivered11. On the other hand, the plaintiff in Derry vs Peek suffered loss when the company wound up as it had been unable to use mechanical or steam power as the misrepresentation had stated. Damage in tort law is proved by satisfying the “but for” test which seeks to establish a chain of causation12. In this case, Bob can show that he would have made a more prudent decision than purchasing Mr. Spoke’s store had the proprietor supplied him with a true picture of the position and past performance of his bicycle store. If Bob chooses to pursue the case under statute, he can rely on the protection offered to consumer by the Australian Consumer Law against deceptive conduct. In this statute, it is an offence for people engaging in trade or commerce to mislead or deceive other parties in order to deceive them to enter into contracts13. Section 18, of the ACL has broader provisions pertaining to deceptive and misleading conduct and is thus easier to proof than action in negligent or fraudulent misrepresentation14. Similar, to fraudulent misrepresentation, misleading conduct under section 18 of the ACL can occur by conduct. The most important element in proving misleading conduct under section 18 is showing reliance as implied by the prohibition of misleading or deceptive conduct. However, the plaintiff must also prove that he suffered damage as a result of a trader’s or seller’s deceptive or misleading conduct. In Garvey v Vamamu Pty Ltd (1988) ATPR 41-656, misleading conduct under section 18 could not be proved as the plaintiff failed to show he suffered damage as a consequence of relying on deceptive or misleading conduct15. In Bob’s case he can easily prove damage as Mr. Spokes deceptive conduct induced him to purchase a business that does perform as he had been made to believe. Conclusion Bob can easily succeed in an action of fraudulent misrepresentation against Mr. Spoke over the misrepresentations he had made regarding the past and future profitability of the store. Mr. Spokes knowingly presented inflated reports that presented his store as performing 55 per cent higher than it actually was. Bob excitedly, purchased the store as he relied on Mr. Spoke’s misrepresentation the store had performed well in the past and would continue to operate profitably in the future. Mr. Spoke’s conduct in this case is akin to the deceptive or misleading conduct prohibited by Section 28 of the Australian Consumer law. Therefore, it can be concluded that Mr. Spoke was liable for fraudulent misrepresentation under tort law and deceptive conduct under statute. Bibliography A. Articles/Books/Reports Cockburn, Tina, and Leanne Wiseman, eds. Disclosure Obligations in Business Relationships. Federation Press, 1996. Morandin, Nicole, and Joshua Smith, eds. Australian Competition and Consumer Legislation 2011 (CCH Australia Limited, 2011) Thampapillai, Dilan, Vivi Tan, Claudio Bozzi, and Anne Matthew, Australian Commercial Law (Cambridge University Press, 2015). B. Cases Beach Petroleum NL v. Johnson (1992) 9 ASCR 404 Commercial Bank Co of Sydney v RH Brown and Co (1972) 126 CLR 337 Derry v Peek (1889) 5 T.L.R. 625 Doyle v Olby [1969] 2 QB 158 Fitzpatrick v Michel (1928) NSWStRp 19 Garvey v Vamamu Pty Ltd (1988) ATPR 41-656 C. Legislation Competition and Consumer Act 2010 (Cth), s. 18 Read More