THE IMPACT OF MISLEADING AND DECEPTIVE CONDUCT ON CONTRACTS FOR THE SALE OF LAND by Stephen Climpson 1, This paper contains (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) A consideration of the operation of relevant provisions in the Law Society standard Contract for the sale of land (2005 ed.) where there has been misleading and deceptive conduct. 2. This paper also annexes (Annexure ‘A") a review of two relatively recent cases where there had been misleading and deceptive conduct in connection with contracts for the sale of land and where some of the principles referred to in this paper were considered and applied. L General Law 3. Where a statement is made in the course of negotiations for a contract which has the effect of inducing another to enter into the contract, the statement may take effect as a term of the contract or as a collateral contract. Alternatively, even though not effective as a term of the contract, if the statement is false and induces the other party enter into the contract, it may give rise to rights and remedies. Such a statement Paper impact Misleading Deceptive Conduct December2011 - CLEANmay be in writing or oral, expressed or implied. Sometimes the statement may be contained in the draft of the contract which is provided to the other party before execution. A statement which takes effect as a “term” of the contract may be referred to as a “warranty”. A statement which is not a term of the contract may be referred to as a “mere representation” If the statement is a ‘warranty” and is false, the falsity is likely to constitute a breach of the contract. If the warranty is an essential term of the contract (being a term but for which the party would not have entered into the contract unless assured of its strict and substantial performance and which ought to have been apparent to the promisor)', the innocent party may elect to rescind the contract and sue for damages. If the warranty is not an essential term, the innocent party may only sue for damages” when it is breached If the statement is a "mere representation” and is false or misleading, it is offen referred to as a “misrepresentation”. A misrepresentation may be described as a false statement of a material fact made by one party (the representor) and another (the representee) which is not a term of the contract but which has the effect of inducing the other party to enter into the contract.® ‘A 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 situation 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 ' See Ciaverella v Balmer [1983] 2 NSWLR at 449 D-E 2 This area of contract law is the subject of a paper by the author entitled "When all goes wrong ~ current issues in property ligation’: * See Halsbury’s Laws of Australia, para 110-5026. Paper Impact Misleading Deceptive Conduct December2011 - CLEANremedy for misrepresentation’, although there may be a right to damages. Rescission 10. 11 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. Traditionally, there was an important difference between rescission under commen law and rescission under equity. Common law rescission was only available where the misrepresentation was fraudulent. Rescission under equity was available even though the representation was innocent, provided that the court was satisfied that it would be unconscionable for the representor to hold the representee to the bargain. 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 posi 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 (1958) 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 fare taken is to adjudicate upon the validity of a purported disaffirmance as an act avoiding the transaction ab initio, and if itis valid, to give effect to it and make appropriate consequential orders.” * Halsbury’s Laws of Australia, para 110-5025. See paragraphs 10 and 11 below [CHECK] ® Halsbury’s Laws of Australia, para 110-5206. Paper Impact Misleading Deceptive Conduct December2011 - CLEAN12. 13, 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 restiutio in integrum. Without these three conditions of misrepresentation of a material fact; fan election to rescind the contract and the availability of restitutio in integrum, rescinding a contract under general law will not be effective and the innocent party may be limited to a claim in damages. Damages 14 15, ‘Apart from rescission, a purchaser has a right to damages from the vendor at common law if there has been a fraudulent misrepresentation. At common law, a purchaser may also be entitled to damages for negligent misrepresentation. The position at general Jaw is still that damages are not available for a misrepresentation that is innocent, that is, neither fraudulent nor negligent. 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 a representation 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) 247 CLR 315 and Pentagold Investments Ply Limited v Raminos (2003) 217 CLR 367.” ® Halsbury’s Laws of Australia, para 110-6205. 7 These cases and relie! against forfeiture generally are the subject of another paper by the author ented "Notices to Complete, Time of Essence clauses and Relief against Forfeiture” Paper Impact Misleading Deceptive Conduct Decernber2011 - CLEANii Overview of the statutory law relating to misleading and deceptive conduct (a)___ Overview of the statutory provisions 16. In relation to conduct occurring after 1 January 2011, the Australian Consumer Law (“ACL”) is the primary source of statute law relating to misleading and deceptive conduct concerning contracts for the sale of land. The ACL applies as a law of the Commonwealth in relation to corporations through the Competition and Consumer Act ("CCA"), and has been adopted as the law of each State and Territory in Australia through individual state and territory statutes 17. Generally speaking, proceedings for misleading and deceptive conduct against corporations will usually be brought under the CCA (which incorporates the ACL) and proceedings against individuals will be brought under the relevant Act of that State or Territory. For example, in the case of New South Wales, the Fair Trading Act 1987 (NSW) Pt 3 incorporates the ACL and makes it the law of New South Wales. 18. Conduct occurring before 1 January 2011 remains the subject of identical provisions to the ACL which were in the Trade Practices Act (TPA) and the Fair Trading Acts ("FTA") which were in force at that time. In this paper, | will only refer to the provisions of the ACL, except where | refer to cases which themselves refer to equivalent provisions in the TPA and FTA, 49. Apart from the ACL, there are provisions in the Conveyancing Act (NSW) which are also relevant when considering remedies for misrepresentations in connection with contracts for the sale of land. @ The prohibition Paper impact Misleading Deceptive Conduct December2011 - CLEAN20. 24. 22 i) 23. 24 Under s.18 ACL, there is a general prohibition that persons must not, in trade or commerce, engage in conduct that is misleading or deceptive or likely to mislead or deceive. Section 30 ACL contains specific provisions ‘relating to false representations concerning land including that a person 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 Other potentially relevant provisions in the ACL include s.4 which is to the effect that where a person makes a representation in relation to a future matter and the person has 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. The remedies Remedies for misleading conduct under the ACL fall essentially under two sections. Section 236 ACL 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 ACL may recover the amount of the loss or damage by action against the other person or against any person involved in the contravention Paper Impact Misleading Deceptive Conduct December2011- CLEAN25. 26 27. 28 29. 30. The second remedial section is s.237 ACL. Section 237 gives the Court a general power to make orders where @ party has suffered or is likely to suffer loss by the conduct of another person engaged in contravention of a relevant provision of the ACL. 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.243 ACL. It has been observed that this section provides a “remedial smorgasbord’.? The main provisions relating to rescission are s.243(a) and (c) ACL. Under s.243(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. Under s.243(c), the court can make an order refusing to enforce any or all of the provisions of such a contract. An order refusing to enforce all of the provisions of a contract would probably have the same or similar effect as an order that a contract be rescinded Apart from s.236 and s.237 ACL, the Court also has power to grant injunctive relief under s.232 ACL. It is important to remember that s.236 and s.237 ACL 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’. Such persons are ® Akron Securities Ltd v Iliffe (1997) 41 NSWLR 353 at 366 per Mason P. Paper Impact Misleading Deceptive Conduct December2011 - CLEANY 32. 33. often described as “accessories” and their liability is often referred to as “accessorial liability’. Section 2 ACL (through the definition of the expression “involved") provides that a person is “involved in a contravention” if that person 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. These “accessorial liability” provisions have particular significance in circumstances where the vendor in the transaction is a company without assets and relief is therefore needed against those who stand behind the company or who have participated or assisted the vendor in the relevant conduct. 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 that is required is actual knowledge of the essential elements of the contravention and intentional participation in it It is also important to bear in mind that, where one is concerned, for example, with a corporate vendor which has engaged in misleading and deceptive conduct, even if a person behind the corporation may not be liable as an accessory (because, for example, he or she did not have actual knowledge of the elements of the contravention), that person may be directly liable under s.18 ACL which prohibits a “person” from engaging in misleading and deceptive conduct. In Houghton v Arms (208) 225 CLR 553 at 567, the High Court held that an act of an individual may be both a corporate act and a separate Paper impact Misleading Deceptive Conduct December2011 - CLEAN34, 35. (ii) 36 act of the actor as an individual for the purposes of a section of the Fair Trading Act in Western Australia which was relevantly the same as 3.18 ACL. In that case, the misleading and deceptive conduct was found in representations made by two employees of a company in the course of and for the purposes of the company's business. The court concluded at (35] “It was the business of (the company) to provide such advice and services. It is not to the point that Mr Houghton and Mr Student [the employees] themselves were not business proprietors or that their activities were an aspect or element of the trade or commerce of [the company] but not “their” trade or commerce. Mr Houghton and Mr Student nevertheless engaged in conduct in the course of trade or commerce and were thus within the ambit of the FT Act.” Accordingly, if the conduct of an individual, albeit as a director or employee of a company, was misleading and deceptive, that individual may be directly liable under s,18 ACL and will not be protected by what is often referred to as “the corporate veil’. That director or employee will be liable under s.18 ACL if that person's conduct was misleading or deceptive or likely to mislead or deceive, regardless of whether they knew their conduct to be misleading and regardless of whether they acted with reasonable care. In relation to the conduct of a body corporate, it is also valuable to keep in mind s.84(2) CCA 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. Provisions apportioning responsibility for damages Under s.137B CCA, if a plaintiff makes a claim in relation to economic loss or damage to property caused by conduct in contravention of s.18 (for example, under s.236 ACL) and the plaintiff has suffered loss or Paper Impact Misleading Deceptive Conduct December2011 - CLEAN10 37. 38. 39. damage partly as a result of the plaintiffs own failure to take reasonable care and 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. The section may be said to be analogous to a limited form of contributory negligence. It 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)). 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, $s.87 CB - 87 Cl CCA (which is Part VIA of the Act) provide for proportionate liability for misleading and deceptive conduct. Those sections 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 these provisions apply to limit the amount a plaintiff may obtain as a damages award. This potentially significant limitation is discussed further below. As with s.137B CCA, these sections of the Act only apply to causes of action arising on or after 26 July 2004. The purpose of identical provisions in the Civil Liability Act (which apply to a damages claim under the FTA) 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 is remedial and it dramatically changes the previous law. Formerly, a plaintiff could choose to sue only one of several wrongdoers who ° The provisions there are similar to those in Part VIA TPA. Paper Impact Misleading Deceptive Conduct December2011 - CLEAN11 40, 4 42. 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.” As with s.137B CCA, ss.87CB- 87Cl CCA only apply to claims for damages made under s.236 ACL for economic loss or damage to property caused by conduct in contravention of s.18 ACL (section 87CB(1)). Those claims are referred to as “apportionable claims’. As with s.137B CCA, the sections have no operation if a concurrent wrongdoer intended to cause the economic loss or fraudulently cause that loss (section 87(CC(1)) The proportionate liability provisions apply even if the loss or damage is based on more than one cause of action (for example, if the cause of action is brought under general law as well as s.18) Under s.87CD(1) CCA, in any proceedings involving an apportionable claim, the liability of a defendant who is a concurrent wrongdoer is limited to an amount reflecting that proportion of the damage or loss claimed that the court considers just, having regard to the extent of the defendant's responsibility for the loss or damage, and the court may give judgment against the defendant for not more than that amount. “Concurrent wrongdoer’ is defined in s.87CB(3) as a person who is one of two or more persons whose acts or omissions have caused, independently of each other or jointly, the damage or loss that is the subject of the claim. Paper Impact Misleading Deceptive Conduct December2011 - CLEAN12 43, 44. 45. 46 47. In the event that proceedings involve both an apportionable claim and a non-apportionable claim, the liability for the apportionable claims Is to be determined in accordance with the provisions of Part VIA CCA and the liability for the other claim is to be determined in accordance with the legal rules that are relevant (i.e. the law as it applies without the operation of Part VIA CCA) (section 87CD(2)).. In apportioning responsibility between defendants in the proceedings, the court is to exclude that proportion of the damage or loss in relation to which the plaintiff is contributorially negligent under any relevant law and the court may have regard to the comparative responsibility of any concurrent wrongdoer who is not a party to the proceedings (s.87CD(2)). The section is to apply whether or not all concurrent wrongdoers are parties to the proceedings (s.87CD(4)) A defendant against whom judgment is given under Part VIA ACL as a concurrent wrongdoer in relation to an apportionable claim cannot be required to contribute to any damages or contribution recovered from another concurrent wrongdoer in respect of the apportionable claim and cannot be required to indemnify any such wrongdoer. Similar provisions concerning proportionate liability apply in relation to a claim for damages brought under FTA. In this respect, the relevant provisions concerning proportionate liability are ss.34-39 of the Civil Liability Act It is important to remember that, although the proportionate liability provisions apply to limit the amount a plaintiff may secure as a damages award against particular defendants, the provisions have no application to other relief that is sought, for example, under s.243 ACL (which include orders rescinding the contract or varying its terms). This may be important for a plaintiff to bear in mind when considering what Paper impact Misleading Deceptive Conduct Decerber2011 - CLEAN13 relief should be claimed if there is a prospect that the main “target” of the claim is arguably a “concurrent wrongdoer” or if there is a likely issue that the plaintiff failed to take reasonable care and was a cause of the loss. 48. The other important statutory provision in the context of misleading and deceptive conduct in connection with contracts for the sale of land is s.55(2A) Conveyancing Act which provides the court with a power, if it thinks fit, to order the repayment of any deposit with or without interest thereon. Under sub-section 3, the court may also declare and enforce a lien in respect of the repayment on the property the subject of the contract. The court's exercise of discretion under this provision is referred to the analysis of the two cases in Annexure A to this paper. ))___ Comparison between General Law and TPA/FTA Statutes 49. There are a number of significant differences between rescission which may be granted under s.243 ACL compared to rescission under the general law. Some of those differences include: (a) Under the ACL, it is not necessary that a party has made an election to rescind, although the existence of affirmation will be relevant to the exercise of the court's discretion to make orders under s.243."° (b) — Under the ACL, it would appear that restitutio in integrum is not essential provided that “practical justice is seen to ‘be done between the parties." (c) Orders under s.243 ACL can be made against third parties. * See Tenji v Henneberry & Associates Pty Limited (2000) 98 FCR 324. "' See Henjo Investments Pty Limited v Collins Marrickville Pty Limited (1998) 39 FCR 546, 64; Acron Securities Limited v lffe (1997) 41 NSW 353, 369-370 (Mason P); Paper Impact Misteading Deceptive Conduct December2011 - CLEAN14 (c) 50. (d) Under the ACL, where a party rescinds, the remedies of rescission and contractual damages are not mutually exclusive. (e) The ACL explicitly allows for partial rescission and enables the court to make order that rescission occur from a particular date (not necessarily ab inititic). As a result of this and other remedies, there is a greater degree of flexibility in relation to an ACL rescission () With rescission under the ACL, the remedy is at the court's discretion whereas, under common law, rescission is the act of the party and the role of the court is to decide on the validity of that act. Accordingly, affirmation by the purchaser of the relevant contract after knowing of the wrong is not an automatic bar to ACL rescission although, as mentioned above, it will be relevant to the exercise of the court's discretion to grant the remedy. Legal principles relating to section 18 ACL — what is misleading and deceptive conduct? The legal principles concerning the application of s.18 ACL to the conduct of a real estate agents who acted for vendors on the sale of land were considered in Butcher v Lachlan Elder Realty Pty Limited (2004) 218 CLR 592. Although that case primarily turned on the effect of disclaimers contained within a brochure distributed by the real estate agent, and although he was a dissentient in relation to that issue, McHugh J's decision contains a helpful summary of the principles concerning s.52 Trade Practices Act (which is relevantly the same as s.18 ACL) and the following outline is primarily from his Honour’s analysis in that decision’? " McHugh J's analysis of some of the key principles was referred to with approval by the High Court in Campbell v Backoffice Investments (2009) 238 CLR 304 at 102. Paper Impact Misleading Deceptive Conduct December2011 - CLEAN15 51. _ First, in relation to the construction of s.52 (and similarly s.18 ACL), the section should be construed flexibly to give the fullest relief which the fair meaning of language of the section will allow.'* In this respect, the courts must give effect to the natural and ordinary meaning of the section even if to do so ‘may result in the imposition of liability and the administration of remedies which differ from those supplied by the general law. This is because the relevant conduct falls to be judged under section 52 not, as at common law, by the state of mind or intention of the maker of the statement’.\* 52. Second, the words “engage in conduct” in s.52 (and similarly s.18 ACL) are not confined to conduct which involves the making of representations."® Section 52 (and therefore s.18 ACL) requires the Court to examine the impugned conduct as a whole. 53. Third, conduct will be misleading or deceptive if it induces or is capable of inducing error.® A corporation does not avoid liability for breach of s.52 (and similarly s.18 ACL) because a person who has been the subject of misleading or deceptive conduct could have discovered the misleading or deceptive conduct by proper inquiry. Conduct that objectively leads one into error is misleading."” Conduct is likely to mislead or deceive if there is a real and not remote chance or possibility that a person is likely to be misled or deceived."* 54. McHugh J in Butcher v Lachlan Elder Realty Pty Limited (2004) 218 592 at 625 at paragraph 109 stated: *® Butcher v Lachlan Elder Realty Ply Limited (2004) 218 CLR 592 per McHugh J at 621, ppragraph 97, “Butcher v Lachlan Elder Realty Pty Limited (2004) 218 CLR 592 at 621-622, paragraph 98. *® Butcher v Lachlan Elder Realty Ply Limited (2004) 218 CLR 592 at 603, paragraph 32 (per Gleeson CJ, Hayne and Haydon WJ); pages 623-625, paragraphs 103-108 per McHugh J; and page 646 at paragraph 179 per Kirby J " Butcher v Lachlan Elder Realty Ply Limited (2004) 218 CLR 592 at 625-626, paragraph 111 and the authorities referred to therein *¥ Butcher v Lachlan Elder Realty Ply Limited (2004) 218 CLR 592 at 626, paragraph 111 and the authorities referred to therein ”® Butcher v Lachlan Elder Realty Pty Limited (2004) 218 CLR 592 at 626, paragraph 112. Paper Impact Misleading Deceptive Conduct December2011 - CLEAN16 55. 56. “The question whether conduct is misleading or deceptive or is likely to mislead or deceive is a question of fact. In determining whether a contravention of s.52 has occurred, the task of the Court is to examine the relevant course of conduct as a whole. It is determined by reference to the alleged conduct in the light of the relevant surrounding facts and circumstances. It is an objective question that the Court must determine for itself. It invites error to look at isolated parts of the corporation's conduct. The effect of any relevant statements or actions or any silence or inaction occurring in the context of a single course of conduct must be deduced from the whole course of conduct. Thus, where the alleged contravention of s52 relates primarily to a document, the effect of the document must be examined in the context of the evidence as a whole, The court is not confined to examining the document in isolation. It must have regard to all the conduct of the corporation in relation to the document including the preparation and distribution of the document and any statement, action, silence or inaction in connection with the document. "'® At page 634, paragraph 139, McHugh J also stated: “Section 52 looks at the conduct of a corporation and is only concerned with whether that conduct misled or was likely to mislead a consumer. It is not concemed with the mental state of the corporation. As Hill J observed in Equity Access Pty Limited v Westpac Banking Corporation [1990] ATPR 40-994 at 50, 951 (135): ‘Section 52 is not confined to conduct which is intended to mislead or deceive... and a corporation which acts honestly and reasonably may nonetheless engage in conduct that is likely to mislead or deceive’.” The lack of relevance of the mental state of the defendant for claims under s.52 TPA (and similarly s.18 ACL) was considered in Johnson Tiles Pty Limited v Esso Australia Pty Limited (2000) 104 FCR 564. At paragraph 66, French J, Beaumont and Finkelstein JJ said: “In the case of an alleged non-disclosure it is not necessary to show that the contravenor knew of the facts not disclosed. In Fraser v NRMA Holdings Limited (1985) 55 FCR 452 at 467, the Full Court said: This passage was referred to with approval by Gumow, Hayne, Haydn and Kieffel JJ in Campbell v Backoffice Investments Ltd (2009) 238 CLR 304 at [102] Paper Impact Misteading Deceptive Conduct Decomber2011 - CLEAN17 For the purposes of s.52, if by reason of what was said and what was left unsaid the conduct of the corporation is misleading and deceptive or likely to mislead or deceive, a contravention would occur even if the corporation through its directors and officers did not have knowledge of the undisclosed facts which rendered the conduct in breach of s.52. A contravention of s.52 may occur without knowledge or fault on the part of the corporation, and notwithstanding the exercise of reasonable care: Parkdale Custom Built Furniture Pty Limited v Puxu Pty Limited (1982] 149 CLR 191 at [197]. “That is not to say that knowledge may not be a relevant circumstance. For in a case where disclosure would reasonably be expected of a fact if that fact were known to the corporation, failure to make disclosure may convey the implication that that fact is not known.” 57. The requirement to examine the overall conduct (including silence) objectively and in context was referred to in Demagogue Pty Limited v Ramensky (1992) 39 FCR, where Black CJ observed at 32: “Silence is to be assessed as a circumstance like any other. To say this is certainly not to impose any general duty of disclosure; the question is simply whether, having regard to all the relevant circumstances, there has been conduct that is misleading or deceptive or that is likely to mislead or deceive. To speak of ‘mere silence’ or a duty of disclosure can divert attention from that primary question. Although ‘mere silence’ is a convenient way of describing some fact situations, there is in truth no such thing as ‘mere silence’ because the significance of silence always falls to be considered in the context in which it occurs. That context may or may not include facts giving rise to a reasonable expectation, in the circumstances of the case, that if particular matters exist they will be disclosed.” 58. Gummow J also observed in that case (Cooper J agreeing) at 40: In any case where a failure to speak is relied upon the question must be whether in the particular circumstances the silence constitutes or is part of misleading and deceptive conduct.” Paper Impact Misleading Deceptive Conduct Decemnber2011 - CLEAN18 59 60. 61. 62. Overall, it may be said that the relevant test for a contravention of s.18 ACL is whether, in the light of all of the relevant circumstances constituted by acts, omissions, statements and silence, the defendant engaged in misleading and deceptive conduct (see Demagogue Pty Limited v Ramensky (1992) 39 FCR 31 at 32, 40-1; 110 ALR 68. The above principles were further elaborated by the High Court in the recent decision of Campbell v Backoffice Investments Ply Ltd [2009] 238 CLR 304. At [24] — [25], French CJ said that the question of whether conduct was misleading or deceptive or likely to mislead or deceive within the meaning of s.42 FTA (and therefore its equivalent in 8.18 ACL) is a question of “characterisation”. At [25], French CJ said: “Characterisation is a task that generally requires consideration of whether the impugned conduct viewed as a whole has a tendency to lead a person into error.” At [26] and [27] the Chief Justice emphasised that the task of characterisation is to be by reference to all the circumstances and the whole context of the questioned conduct. This will include the particular person who engaged in the conduct and the particular purchaser who is said to rely on the conduct, bearing in mind what matters of fact each knew about the other as a result of the nature of their dealings and the conversations between them and facts which each may be taken to have known At [35], French CJ said that there is no reason in principle why the fact that a false statement is contained in a contractual document thereby takes the use of that statement out of the scope of “misleading or deceptive conduct” (and therefore the operation of s.18 ACL). His Honour went on to say: “Whether the proffering of a contractual document containing a false statement amounts to a misrepresentation or to misleading or deceptive conduct, is a matter of fact to be determined by Paper Impact Misleading Deceptive Conduct December2011 - CLEAN19 reference to all the circumstances, The circumstance that such a representation is the subject of a contractual warranty does not, as a matter of law, exclude the making of it from the purview of the statutory provision. This is consistent with the observation by Lockhart and Gumow JJ in Accounting Systems 2000 (Developments) Pty Lid v CCH Australia Ltd: the making of a statement as to a presently existing state of affairs, if false, may be the engaging in misleading or deceptive conduct, where the statement is embodied as a provision of a contract.” Disclaimers / Mere Conduit 63. 64 The need to consider the conduct by reference to all the circumstances is important when the person who is alleged to have engaged in the misleading conduct has given a disclaimer. In Campbell v Backoffice Investments Pty Ltd at [29] and following, French CJ said that a contemporaneous disclaimer by the person engaging in the impugned conduct is likely to go to the characterisation of the conduct (i.e. whether the conduct was misleading and deceptive). At [30], the Chief Justice said “[That] situation was discussed in Yorke v Lucas. Speaking of an example in which a corporation merely passes on false information provided by another, Mason A-CJ, Wilson, Deane and Dawson JJ said “if the circumstances are such as to make it apparent that the corporation is not the source of the information and that it expressly or impliedly disclaims any belief in its truth or falsity, merely passing it on for what it is worth, we very much doubt that the corporation can be said to be itself engaging in conduct that is misleading or deceptive.” Commenting on this passage, the majority in Butcher v Lachlan Elder Realty Ply Ltd said “In applying those principles it is important that the agent's conduct be viewed as a whole. It is not right to characterise the problem as one of analysing the effect of its “conduct” divorced from “disclaimers” about that “conduct” and divorced from other circumstances which might qualify its character.” Paper Impact Misleading Deceptive Conduct December2011 - CLEAN20 65. McHugh J in Butcher v Lachlan Elder Realty Pty Ltd summarised the principles that apply when a company (said to have engaged in misleading and deceptive conduct) has made a disclaimer”. At [123- 124), McHugh J said: “However, the courts have held that in three situations a corporation does not contravene s 52 when it passes on erroneous information. They are: (1) where the circumstances make it apparent that the corporation is not the source of the information and that it expressly or impliedly disclaims any belief in its truth or falsity and is merely passing on the information for what it is worth (see Yorke (1985) 158 CLR 661 at 666, per Mason A-CJ, Wilson, Deane and Dawson JJ; Lezam (1992) 35 FCR 535 at 552-553, per Sheppard J, Hill J concurring.); (2) where the corporation, while believing the information, expressly or impliedly disclaims personal responsibility for what it conveys, for example, by disclaiming personal knowledge (Saints Gallery Ply Ltd v Plummer (1988) 80 ALR 525 at 530-531); and (3) where the corporation, while believing the information, ensures that its name is not used in association with the information (Amadio Ply Ltd v Henderson (1998) 81 FCR 149 at 257.). If the circumstances of the case make it apparent that the corporation is not the source of the information, that it disclaims any belief in its truth or falsity and is merely passing the information on for what it is worth, it is unlikely that the corporation will contravene s 52. In Global Sportsman (1984) 2 FCR 82 at 90), Bowen CJ, Lockhart and Fitzgerald JJ said that “[sluch a statement is essentially different in the meaning which it contains or conveys unless it is adopted by the publisher and he will not necessarily do this by merely publishing the statement.” Thus, a corporation which acts as a “mere conduit” for information supplied by another will ordinarily not be taken to have engaged in misleading or deceptive conduct or conduct that is likely to mislead or deceive (see, eg, Gardam (1988) 82 ALR 415 at 427, per French J) 66. _ In Orix Australia Corporation Ltd v Moody Riddell & Partners Pty Ltd & Anor [2006] NSWCA 257 Ipp JA (with whom Spigelman CJ and Basten JA agreed) said at [18] ?°\n Jainran Pty Ltd v Boyana [2008] NSWFC 468, Bryson AJ referred to McHugh’s analysis as a ‘valuable guide" at (112). In this regard, his Honour said that, whilst the majority in that decision took an altogether different approach to the result of applying the principles to facts to that taken by McHugh J, this did not distract from the value of McHugh 4's formulation. Paper Impact Misleading Deceptive Conduct December2011 - CLEAN24 67. 68. 69. (a) 70, “In Butcher, the majority say at 605 [39] that in applying the “principles” set out in Yorke v Lucas at 666, “it is important that the agent's conduct be viewed as a whole’. McHugh J expresses similar views at 625, [109].” ‘At [45] Ipp JA encapsulated the majority decision in Butcher as follows: “Their Honours held that an innocent agent, who merely acts as a conduit and makes it clear, expressly or impliedly, that he or she is doing no more than passing on information obtained from others, does not attract liability under s 52.” At [46], Ipp JA described the relevant inquiry as: “Whether it would be plain to a reasonable purchaser that the agent was not the source of the misleading information.” Overall, where a disclaimer has been made, it is suggested that the relevant question is what a reasonable person in the position of the plaintiff would make of the agent's behaviour (including the disclaimer)*". If it was “plain” to a reasonable purchaser that the agent was not the source of the information which was said to be misleading and did not “purport” to do anything more than pass on information supplied by others, expressly or impliedly disclaiming any belief in the truth or falsity of the information, itis then that the defendant will not be liable”, Legal principles relating to section 18 ACL ~ what is “trade and commerce"? In O'Brien v Smolonogov (1983) 53 ALR 107, the Federal Court held that a private sale of a parcel of rural land was not a transaction ‘in trade or commerce’. The Federal Court applied American decisions ® See [60] in Butcher v Lachlan Elder Realty. ® See [51] in Butcher v Lachlan Eider Realty. Paper Impact Misleading Deceptive Conduct December201 1 - CLEAN22 7 72. 73. 74, which drew a distinction between private sales and sales in a business context. In Bevanere Pty Limited v Lubidineuse (1985) 7 FCR 326 at 330, the Full Federal Court said that the ratio of the O’Brien case was that “a private sale of property by an individual is not conduct in trade or commerce except if done in a course of a business activity or otherwise arising in a business context’. The Full Court distinguished O'Brien's case on the basis that the land in that case was not used for any business activity. In Vella v Permanent Mortgages Ply Limited (2008) NSWSC 505, Young CJ said that, whether any individual case activity comes within trade or commerce is essentially a matter of fact to be decided in all the circumstances of the case. In Havyn Ply Limited v Webster [2005] NSWCA (referred to hereunder), the New South Wales Court of Appeal upheld the trial judge's determination that, in circumstances where a vendor had inherited flats and let them out for the purpose of deriving an income did constitute the carrying on of a business on the property and that representations made conceming the size of the flats during the course of negotiations for the sale of the property was conduct “in trade or commerce”. Overall, s.18 ACL will not apply to circumstances where there is a sale of land which is used for residential purposes only and where the vendor has used and the purchaser intends to use the premises for domestic use only. However, where the property has been rented out and the vendor is selling the asset with an intention to invest the proceeds in more profitable rental properties, conduct in that context will be in trade or commerce. In addition, if a real estate agent has engaged in misleading and deceptive conduct in connection with the Paper Impact Misleading Deceptive Conduct December2011 - CLEAN23 75, i) 76. 7 78. sale of land which is to be used for residential purposes only, it is likely that the agent's conduct will be “in trade or commerce” Legal principles relating to relief for a contravention of secti ~ the suffering of loss “by” the misleading and deceptive conduct In Havyn Pty Limited v Webster [2005] NSWCA 182, at paragraphs 116-117, Santow JA (Tobias AJ and Brownie AJA concurring) provided a useful summary of the law in relation to causation and relief for breaches of s.52 (and similarly s.18 ACL). The following is a summary of the propositions which his Honour derived from High Court authority as well as a reference to more recent High Court authority, Causation generally First, when seeking relief under sections 82 or 87 TPA (and similarly its equivalents in s.236 and s.237 ACL) it is necessary to show that there is loss or damage caused by the contravention. The relevant question is whether the innocent person has suffered loss ‘by’ conduct of the contravening party. The term “by” invokes the "common law practical or common-sense” concept of causation Second, causation is a question of fact to be determined by reference to common sense and experience, and one upon which policy considerations and value judgments necessarily enter. The law looks at what influences the actions of parties, acknowledging that people can be swayed by several considerations to varying extents, rather than considering cause and effect in mathematical or philosophical terms. Paper Impact Misleading Deceptive Conduct December2011 - CLEAN24 79. 80. 81. 82, 83. Third, loss or damage is causally connected to a contravention of the Act if the conduct materially contributed to the loss or damage. It is not necessary that the conduct be the sole, principal or dominant cause and causation is satisfied even if, without more, the contravention would not have brought about the loss. In the context of s.52 (and similarly s.18 ACL), where the form of misleading conduct is constituted by misrepresentation, acts done by the representee in reliance upon the misrepresentation amount to a sufficient connection to satisfy the concept of causation Fourth, causation does not have to be established by direct evidence of the part that the relevant conduct played. The court may by inference determine the effect which a representation is taken to have. Such an inference may arise where a representation operated as an inducement in circumstances where it was materially likely to induce a representee to enter into a contract and the person actually enters into the contract. It is for the person whose contravening conduct materially contributed to the loss or damage to prove that some component of that loss or damage is referable only to some act or event other than his or her contravention. The High Court gave further consideration to the question of “causation” in the recent decision of Campbell v Backoffice Investments Ltd [2009] 238 CLR 304. At [24], French CJ emphasised that it is important to maintain the distinction between characterisation of the conduct (i.e. whether it was misleading and deceptive) and determining the causation of the claimed loss said to result from the conduct. In maintaining that distinction, His Honour also said that it is necessary to acknowledge that there “may be practical overtaps in the resolution of these logically distinct questions. The characterisation of Paper Impact Misleading Deceptive Conduct December2011 - CLEAN25 84. di) 85, 86. 87. conduct may involve assessment of its notional effects, judged by reference to its context. The same contextual factors may play a role in determining causation.” At [29] and following, the Chief Justice referred to circumstances where there is a disclaimer of reliance by the person allegedly affected by the conduct. In this regard, His Honour said that such a declaration of non-reliance on the conduct is more likely to be relevant to the question of causation. At [31], the Chief Justice said “Where the impugned conduct comprises allegedly misleading pre-contractual representations, a contractual disclaimer of reliance will ordinarily be considered in relation to the question of causation. For if a person expressly declares in a contractual document that he or she does not rely upon pre-contractual representations that declaration may, according to the circumstances, be evidence of non-reliance and of the want of a causal link between the impugned conduct and the loss or damage flowing from entry into the contract. In many cases, such a provision will not be taken to evidence a break in the causal link between misleading and deceptive conduct and loss. The person making the declaration may nevertheless be found to be actuated by the misrepresentations into entering the contract. The question is not one of law, but of fact.” Monetary compensation In relation to what monetary compensation ought to be awarded pursuant to 8.236 and s.237 ACL, the following is a summary of what Santow JA described (in Havyn Pty Ltd v Webster) as the propositions emerging from the authorities. Once causation is established, the measure of relief available under s.82 TPA (and similarly s.236 ACL) is not to be confined by analogy to breach of contract, tort or equitable remedies. Although the amount of loss or damage caused by a contravention for misrepresentation will often coincide with what would have been Paper Impact Misleading Deceptive Conduct Decemiber2011 - CLEAN26 88. 89. 90. 91 92. awarded in an action for deceit, the question is what damage flowed from (in the sense of being caused by) the contravention. It is necessary to identify the detriment which is said to be the loss or damage which has occurred or which is likely to occur. The language of the statute does not support any assumption that loss in this context should be necessarily singular, or be incurred either on capital account or on revenue account. Economic loss caused by a contravention of the Act may take a variety of forms. But where it is caused by misleading or deceptive conduct, it is essential that the plaintiff has sustained a prejudice or disadvantage as a result of altering his or her position under the inducement of the misleading conduct. Such loss is usually quantified by comparing the value of what was acquired (based on the price freely contracting fully informed parties would have offered and accepted for it) with what was paid, in order to assess whether the party misled could have acted in some other way (or refrained from acting) which would have resulted in him or her obtaining greater benefit or incurring less detriment. Thus the loss can be described as akin to “reliance loss", and the measure of damages is that which applies in relation to torts (especially deceit and negligent misrepresentation), although it is the plain words of the statute which are ultimately determinative and it should not be assumed that the common law rules apply to all claims for relief under the Act A measure of damages for reliance loss will generally not include damages for loss of expectation or profits, unless it is shown, for example, that reliance has deprived the innocent party of the Paper Impact Misleading Deceptive Conduct December2011 CLEAN27 opportunity of entering into a different contract in respect of which he would have made a profit. 93. The measure of damages may vary depending upon whether the innocent party elects to affirm or rescind the contract, as it affects the terms of the comparison of what was acquired of what was paid for it. However, in all cases, it depends upon proper identification of the relevant loss or damage actually sustained and the application of the ‘Act to compensate for that loss. As referred to above, the amount of damages to be awarded may also be impacted by the operation of the proportionate liability provisions referred to above. I___Impact of provisions in the standard Contract of Sale 94. A good starting place where an issue arises concerning misleading and deceptive conduct in connection with the sale of land is the contract itsett 95, Annexure “B” to the this paper contains the provisions within the Law Society's standard Contract for the sale of land (2005 ed.) which may be relevant where there has been misleading and deceptive conduct in connection with the sale. 96. | wish to make a few observations in relation to those standard provisions. 97. First, clause 7 contains provisions concerning how a “claim” is to be made by a purchaser before completion. Claims under that clause include, among other things, claims where there have been errors or misdescriptions in the contract concerning “property, the title or anything else and whether substantial or not’ (see clause 6.1). The expression “claim” is not defined. However, it includes a claim under Paper Impact Misteading Deceptive Conduct December2011 - CLEAN28 98. 99, clause 6 for “misdescription” which may clearly include misrepresentations. Does a claim under clause 7 include other claims for misleading and deceptive conduct generally? Whilst clause 10.1 precludes claims in respect of certain matters including “a promise, representation or statement about this contract, the property or the title not set out or referred to in this contract” (clause 10.1.5) or “anything the substance of which is disclosed in this contract” (clause 10.1.9), if there has been misleading and deceptive conduct outside those areas, in my opinion, clause 7 provides a mechanism whereby claims for such conduct can be made. For example, if the misleading and deceptive arises from oral misrepresentations or from the non-disclosure of certain matters, clause 7 is arguably an appropriate mechanism whereby claims for compensation arising out of such matters are to be made (if those matters become apparent before completion). Whilst clause 7 uses the word “can”, not the word ‘must’, it provides that a claim for compensation where it is made before completion can be made “only” by serving it in the manner provided in that clause. Clause 7 provides valuable rights to both vendor and purchaser if such acclaim is made. From the vendor's perspective, it provides a valuable right to rescind the contract if the total amount claimed exceeds five percent of the price. In those circumstances, the vendor can serve a Notice of Intention to Rescind and, if the purchaser does not waive the claims within 14 days, the vendor can rescind under clause 19.2 (unless otherwise provided). If the vendor elects to rescind, the deposit and any money paid by the purchaser is refunded; the vendor can claim a reasonable adjustment if the purchaser has been in possession; either can party claim for damages, costs and expenses arising out of a breach of the contract, but otherwise the parties are not liable to the other party for damages, costs or expenses (clause 19.2) Paper Impact Misleading Deceptive Conduct December2011 - CLEAN29 100. 101 102. Under clause 7.2, if the vendor does not rescind, there is a mechanism whereby the parties are required to complete under the following procedure: = the lesser of the amount claimed and 10% of the price is held by the deposit holder until the claims are finalised or lapse (clause 72.1); = the claims must be finalised by an arbitrator appointed by the parties or by an arbitrator appointed by the President of the Law Society (clause 7.2.3); = If the parties do not appoint an arbitrator and neither party requests the President to appoint an arbitrator within three months after completion, the claims lapse (clause 7.2.6) The above provides a valuable right to the parties to a low cost method of seeking to resolve claims arising out of misleading and deceptive conduct where the purchaser does not wish to rescind the contract but wishes to affirm it but with a reduction in the purchase price. The downside from a purchaser's perspective is that, if such a claim is made, and the claim exceeds five percent of the price, the vendor may wish to rescind the contract if the purchaser does not waive its claim within 14 days after service of such a notice. Some interesting issues arise if the purchaser serves a notice waiving such claim (presumably to avoid the result that the vendor would otherwise rescind the contract). Would a purchaser in those circumstances be waiving any residual rights which it may have to claim damages under the ACL after completion has occurred? Whilst parties cannot contract out of the provisions of the ACL in relation to misleading and deceptive conduct, a purchaser who, with knowledge that there has been misleading and deceptive conduct, makes a claim under clause 7 for compensation and then “waives” those claims in accordance with the clause is arguably estopped from subsequently bringing a claim for damages after completion. Such an estoppel Paper Impact Misleading Deceptive Conduct December2011 - CLEAN30 103. 104. 105. argument could potentially be supported if the vendor gave evidence that, if such a waiver had not been made, he or she would have rescinded the contract rather than be faced with a claim for misleading and deceptive conduct On the other hand, an estoppel may be avoided if any waiver is expressed to be limited to a waiver of contractual rights under clause 7 and not a waiver in relation to rights which the purchaser may have under the ACL. The likely consequence of such an approach would be that the purchaser would be required to complete by paying the whole of the purchase price on settlement, but proceed to claim damages under the ACL after completion. In my view, the better argument is that clause 7 does not operate to require a purchaser to relinquish his or her rights under the ACL arising out of misleading and deceptive conduct after he or she has made a claim under clause 7. Similarly, the provision in clause 10.1.5 to the effect that the purchaser cannot make a claim for a representation or statement about the property or the title not set out in the contract (clause 10.1.5) or anything the substance of which is disclosed in the contract (clause 10.1.9), whilst relevant to the operation of clause 7, will not operate to prevent a purchaser from seeking relief under the ACL. Similarly, the provisions of clause 10.1 which prohibit a purchaser from rescinding by reason of the various matters set out in that clause would also not prevent the court from finding that a purchaser validly rescinded the contract for misleading and deceptive conduct or from exercising its discretion under s.237 ACL to do so, although the existence of the provision will be relevant to the exercise of that discretion. In Clark Equipment Australia Limited v Kovcat Pty Limited (1987) 71 ALR 367, Sheppard J at 371 said: “Parties may agree that statements and representations made antecedently to their entering into a contract are not to form the Paper Impact Misleading Deceptive Conduct Decomber2011 - CLEAN31 106. 107. basis of any remedy in the event of there being a subsequent disagreement. Except in the case of fraud, the common law will give effect to their contract. But the remedy conferred by s.52 of the Trade Practices Act will not be lost, whatever the parties may provide in their agreement. If a vendor of goods has engaged in misleading and deceptive conduct, the law makes him accountable for loss and damage suffered as a result of his unlawful conduct. That conduct will usually have been committed, as in this case, prior to the signing of any contract. If, as a result of the conduct, a person is induced to enter into a contract and suffers loss, an action to recover it ies. The terms of the contract are irrelevant. As Wilcox J said in Petera Ply Limited v EAJ Ply Limited (1985) 7 SCR 375 at 378: ‘Whatever may be the effect of cl.19 (the exemption clause in that case] in relation to an action brought in contract, in which reliance is placed upon an alleged warranty or condition not included in the contract of sale, that clause should not be allowed to defeat a claim based on s.52. To permit such a clause to defeat such a claim would be to accept the possibility that a vendor might exacerbate his deception, as by actively misleading a purchaser as to the existence or nature of such an exclusion, and thereby ensure that he would escape liability’."* Another interesting question arises in circumstances where the purchaser, after completion, commences proceedings for damages which could have been the subject of a claim under clause 7 because he or she was aware of the contravention before completion, but chose not to invoke rights under clause 7. In those circumstances, the vendor could defend the proceedings on the basis that clause 7 provided a mandatory procedure for claims for compensation before completion which entitled the vendor to rescind the contract if the purchaser was not prepared to waive the claims. If clause 7 does provide a mandatory procedure for the making of claims before completion, it may be argued by the vendor that the subsequent claim after completion was in breach of clause 7, that he or she would have rescinded the contract unless a waiver was provided and that accordingly the damages which he or she has suffered by reason of the breach is the detriment of having to face a damages claim itself after completion, when he or she would otherwise have rescinded and sold the property elsewhere. In my opinion, the better view is that clause 7 should not be regarded as providing a mandatory procedure for claims for misleading and % ajso see The Full Federal Court in Hanjo Investments Pty Limited & Ors (1988) 79 ALR 83 at 98. Paper Impact Misleading Deceptive Conduct December2011 - CLEAN32 deceptive conduct under s.18 where those claims are known before completion, particularly in the light of the authorities (some of which are referred to above) to the effect that you cannot contract out of the provisions of the ACL. DATED: 7 December 2011 Stephen W Climpson Barrister 11" Floor Wentworth Chambers 180 Phillip Street SYDNEY NSW 2000 Pper impact Misleading Deceptive Conduct December2011 - CLEAN