David wants to buy a reliable car that he can take camping in the bush with his friends and family. He approaches Harry, who owns and manages a car dealership. Harry has 40 years of experience within the car industry and is a qualified automobile mechanic of 25 years. He specializes in 2^nd hand 4WD (four-wheel drive) repairs.

David tells Harry he has a budget of $35,000 and that he wants to buy a car that is not very old, has been well looked after and will not have any problems when travelling through remote areas and on rough outback roads. Harry, who has been struggling in recent times to return a profit in his business, sees an opportunity to make an easy sale and shows David a Range Rover he has on sale for $32,000.

Harry tells David, "I know the full history of this particular Range Rover. The only person who has ever owned it was named Rick, who bought it six months ago. He was an elderly fellow who returned it because it was just too big for what he needed. But the Range Rover is in perfect condition and has no mechanical issues. I've done work on it a number of times and it is pretty much as good as new."

After some consideration, David takes Harry's advice and signs the paperwork to purchase the Range Rover. However, the following month, while David is on his way to his favourite camping location, the car's brakes fail and David crashes into a tree on the edge of the road. David's insurance company investigates the accident.

According to a report prepared by the insurance company, the Range Rover was first owned by John, who purchased it brand new over 10 years ago. The report states that John misused the Range Rover for nine years through illegal street racing and then sold it privately to Rick through a dealership for $10,000. After 6 months, Rick then decided to sell the car for $5,000 to Harry, due to it having so many mechanical problems.

David phones Harry demanding an explanation. Harry replies, "Mate, I have the logbook here that shows all previous owners of the car. It came with the car when I got it. The only previous owner listed here is Rick. That is honestly all the information I have." When questioned about the condition of the car, Harry also tells David, "As I've said to you before, the car was in great shape when you bought it."

"Model" Answer

Issue 1

Can David bring an action against Harry under Contract Law?(analysis 1)

Law

Misrepresentation

If a contract is affected by a vitiating factor the innocent party may be able to set it aside. One example of a vitiating factor is misrepresentation. Misrepresentation occurs when:

Element 1:A false statement/representation of fact is made by the representor to the representee;

Element 2:With regard to an existing fact or past event - not statements of future intention;

Element 3:Before or at the time the contract is concluded; and

Element 4:Intended to induce and in fact does induce the other party to enter into the contract.

See: Edgington v Fitzmaurice

There are three kinds of misrepresentation: fraudulent, negligent and innocent. The innocent party can sue for damages (in addition to terminating the contract) in the case of a fraudulent or negligent misrepresentation but not innocent misrepresentation. See: Whittington v Seale-Hayne

Fraudulent Misrepresentation

General definition:This occurs where the representor knows or believes that the statement is untrue and presents it to be true or accurate with the aim of making the other party enter into the contract.

Element 1:A false statement of fact is made by one party to the other;

Element 2:The statement is made knowingly, with a lack of belief in its truth or recklessly;

Element 3:The statement induces the other party to enter into the contract; and

Element 4:The statement results in damage to the innocent party.

The innocent party may rescind the contract and sue for damages.

See: Derry v Peek: In the prospectus released by the defendant company, it was stated that the company was permitted to use trams that were powered by steam, rather than by horses. In reality, the company did not possess such a right as this had to be approved by a Board of Trade. Gaining the approval for such a claim from the Board was considered a formality in such circumstances and the claim was put forward in the prospectus with this information in mind. However, the claim of the company for this right was later refused by the Board. The individuals who had purchased a stake in the business, upon reliance on the statement, brought a claim for deceit against the defendant's business after it became liquidated.

It is important to note that the law regarding false misrepresentation was still developing and this was an important case in doing so. In this case, the court was required to assess the statement made by the defendant company in its prospectus to see whether the statement was fraudulent or simply incorrect. The claim of the shareholders was rejected by the House of Lords.

The court held that it was not proven by the shareholders that the director of the company was dishonest in his belief. The court defined fraudulent misrepresentation as a statement known to be false or a statement made recklessly or carelessly as to the truth of the statement. On this basis, the plaintiff could not claim against the defendant company for deceit. (analysis 2)

Negligent Misrepresentation

This occurs where the representor makes an incorrect statement carelessly.

Element 1:A relationship/special position exists between parties such that the person providing the information or advice must exercise a duty of care;

Element 2:Subject matter is of a serious business or business nature;

Element 3:Person providing the advice realises that the recipient intends to act upon that advice or information;

Element 4:It was reasonable for the recipient to rely on the advice or information; and

Element 5:Damage was suffered by the recipient, usually monetary: Esso Petroleum v Mardon

These principles are not confined to those who carry on a profession, business or occupation involving the giving of advice. They are also not confined to the provision of "advice", but also "information". See: L Shaddock v Parramatta City Council No 1.

The innocent party may rescind the contract and sue for damages.

Innocent Misrepresentation

General definition: This occurs where the representor makes an incorrect statement which the representor, at the time, believes to be true.

Element 1:When the representor does not intend to deceive anyone; and

Element 2:The misrepresentation is made unintentionally.

The innocent party may rescind the contract, but not sue for damages.

See: Oscar Chess v Williams: Williams sold a car to a car dealership company called Oscar Chess. Williams told Oscar Chess that the car was a 1948 model, but the registration book upon which this statement was made was forged. Oscar Chess later discovered that it was a 1939 model and therefore worth less. The court held that, unlike the company that had extensive experience in the car industry, Williams was inexperienced in knowing about cars and did not work in the industry. The only source of information Williams could rely on was the logbook. Therefore, the representation was found to be innocent in nature.

Application

Misrepresentation

In determining whether a misrepresentation occurred, the relevant statements under consideration are:

Statement 1: I know the full history of this particular Range Rover. The only person who has ever owned it was named Rick, who bought it six months ago.

Statement 2: The range Rover is in perfect condition and has no mechanical issues. I've done work on it a number of times and it is pretty much as good as new.

Applying the 4 elements:

Element 1: Both statements are false and made by Harry to David.

Element 2: Statement 1 is a statement in relation to a past event. Statement 2 is a statement in relation to an existing fact.

Element 3: Both statements were made before the contract was signed.

Element 4: Both statements induced David to buy the Range Rover. (analysis 3)

Therefore, Harry made multiple misrepresentations.

Fraudulent Misrepresentation

Element 1:See above.

Element 2:There are strong facts in the scenario from which this can be inferred. Harry has 40 years of experience within the car industry and is a qualified automobile mechanic of 25 years. He specialises in second-hand four-wheel-drive repairs. It would be highly unusual if, given his background, he was completely unaware of the history and condition of the Range Rover. Given that he was motivated to make the sale, it is possible that he made the statements knowing they were false or without regard to whether they were true or not. Even giving Harry the benefit of the doubt, he could have undertaken further due diligence or searches to confirm the validity of the statements. The fact that the insurance company was able to discover further facts regarding the history and condition of the car indicates that this information may have been accessible to Harry.

Element 3:See above.

Element 4:David has spent $32,000 on a defective Range Rover.

These facts are different from Derry v Peek where the directors held an innocent belief that the government authority would grant permission to use steam trains. There was no evidence of malice or recklessness. In contrast, the facts here give rise to strong indications of possible deception or recklessness. Harry's background and experience combined with the above circumstances indicate that he either knew or should have known that the statements were wrong.

If fraudulent misrepresentation can be proven, David can rescind the contract and sue for damages.

Negligent Misrepresentation

Should fraudulent misrepresentation not be found, negligent misrepresentation would be established. The relevant elements are as follows:

Element 1:Harry is in a special position in relation to David because Harry is a professional expert with particular expertise in the car industry.

Element 2:See above.

Element 3:Harry would have realised that David intended to rely upon the information, given that Harry was motivated to make the sale due to his struggling business, that Harry was a known expert in the field that Harry knew David was looking to make a purchase.

Element 4:See above.

Element 5:David paid $32,000 for the Range Rover.

Harry's statements are classified as "information" (rather than "advice") which is covered by these principles: L Shaddock v Parramatta City Council No 1.

Harry breached his duty of care by providing incorrect information without taking adequate steps to verify its truth (as discussed above), causing David to suffer pure economic loss in the form of $32,000.

Innocent Misrepresentation

Harry might argue that the misrepresentation was innocent in which case the only available remedy is rescission.

Element 1:Harry might point to the logbook which shows all previous owners of the car. However, given Harry's experience and background, it is reasonable to argue that he should have undertaken further investigations to determine the veracity of the information in the book. The insurance company was certainly able to do so. Harry, who was struggling in his business, would have possibly had a motive to make a fraudulent misrepresentation.

Element 2:Harry might say there was a lack of deceit in his statements. However, for the above reasons it is possible that he would have the required level of intention. Actual proof of fraud may be hard to show, but it seems quite probable that he made the statements without regard to their truth or otherwise.

This case is different from Oscar Chess v Williams where the seller had little knowledge about cars, and it was therefore unreasonable to rely upon their statements. They relied upon the logbook in honest belief as to the truth of its contents and had no reason to doubt the information contained in it. In contrast, Harry has several decades of experience and appears motivated to make the sale. He did not pursue further enquiries, in circumstances where such efforts may have enabled him to confirm or deny any suspicions he may have had. The fact that an insurance company was able to find this information is another relevant feature. When these circumstances are viewed as a whole, there is a genuine case that Harry acted recklessly and not innocently.(analysis 4)

Conclusion

On the balance of probabilities, David's action in misrepresentation against Harry would be successful. The most likely form of misrepresentation here would be fraudulent misrepresentation, which if proved would enable David to rescind the contract and sue for damages that resulted from the breach.(analysis 5)

Your task is to provide your analysis of the 5 underlined numbered areas in the corresponding table / boxes provided below. Your analysis should focus on whether the "model" answer uses the correct ILAC

Answer Analysis Submission Document

Analysis 1
Analysis 2
Analysis 3
Analysis 4
Analysis 5