The Law Handbook 2024

Chapter 7.1: How contract law works 679 damages, even where the misrepresentation does not constitute a term of the contract. Where this is the case, the amount of damages is not the amount necessary to put the misled party into the position they would have been in had the misrepresentation been true. Rather, damages is the amount necessary to put the misled party into the position they would have been in had the misrepresentation not occurred. By contrast, where the misrepresentation consti­ tutes a term of the contract, the amount of damages is based on the amount necessary to put the misled party into the position they would have been in had the contract been performed (i.e. as if the misrepresentation was true). Termination If the misrepresentation constitutes a condition of the contract (i.e. it is essential to the parties), or is an intermediate term of the contract (a breach of which would cause substantial loss of benefit), a misled party may choose to terminate the contract (which is different to rescinding the contract). The effect of terminating a contract is that the contract is valid up to the date of termination, but is then at an end and the parties are discharged from any remaining obligations they have under the contract. Under the ACL, the court has the discretion to order a contract be terminated. A misled party can sue for ‘loss of bargain’ damages, which is the amount necessary to put the misled party in the position they would have been in had the contract been completed and the parties had fulfilled all their obligations. If the misrepresentation constitutes a warranty (that is, it is a non-essential and subsidiary term of the contract), then the misled party is not entitled to terminate the contract, but they are entitled to damages for the loss suffered as a result of the breach of that warranty. What type of misrepresentation was made? Under the common law and equitable principles, there are three types of misrepresentation: 1 fraudulent misrepresentation; 2 negligent misrepresentation; 3 innocent misrepresentation. Fraudulent misrepresentation To prove fraud, it is necessary to show that the person making the statement knew it was false, had no belief in its truth, or knew it might be false and recklessly went ahead and made it anyway, not caring whether it was true or false. This is a subjective test; if the person who made the representation honestly believed that the representation was true, no matter how unreasonable, negligent or silly, then that person has not made a fraudulent misrepresentation. Accordingly, it is very difficult to prove fraud. However, once fraud is proven, the misled party can rescind the contract if they were induced to enter into the contract due to such fraud or sue for damages for deceit. It may be possible to recover damages for the loss caused by the fraud even where the loss was unforeseeable. As set out above, the misled party may also be entitled to contractual remedies (e.g. damages/ termination) if the fraudulent misrepresentation constituted a term of the contract. Negligent misrepresentation To prove negligent misrepresentation, it must be shown that: • the person making the representation owed a duty of care to the other party to ensure that any information they gave was true and reliable; and • the person breached that duty of care because the statement was misleading or false and made without due care; and • the misled party suffered loss or damage by relying on that misrepresentation, which was reasonably foreseeable and not too remote. A duty of care will be found where the person making the representation could reasonably be expected to foresee that the statement would be relied on. This can be due to some special skill or superior knowledge that they possess, as compared to the other party, and it is reasonable in the circumstances for the other party to rely on the statement. If the negligent misrepresentation caused the misled party to enter into the contract, then the misled party can rescind the contract or sue for damages for negligence. Unlike fraud, the misled party can only recover damages that were reasonably foreseeable. The misled party may also be entitled to contractual remedies (e.g. damages/termination) if the negligent misrepresentation constituted a term of the contract.