I. INTRODUCTION
2.1 The Sale of Goods Act 1923 (NSW) does not purport to deal generally with the law of misrepresentation. Section 4(2) does, however, preserve the rules relating to the effect of fraud and misrepresentation. This subsection provides:
The rules of the common law, including the law merchant, save in so far as they are inconsistent with the express provisions of this Act, and in particular the rules relating to the law of principal and agent, and the effect of fraud, misrepresentation, duress, or coercion, mistake, or other invalidating cause, shall continue to apply to contracts for the sale of goods, provided that there shall not be deemed to be or to have been any market overt in New South Wales.
Except for the proviso, the words of the subsection are copied exactly from s6l(2) of the Sale of Goods Act 1893 (UK).1
2.2 The problem with s4(2) is that it does not preserve the rules of equity which apply to misrepresentations2 unless the expression “rules of the common law” is wide enough to include general equitable principles.
2.3 It can be seen from the above that whether equitable rules governing misrepresentation are saved by s4(2) depends on a wider issue of statutory interpretation. It is therefore impossible to deal with the particular problems of misrepresentation without also considering the meaning of the expression “the rules of the common law”.3
II. “THE RULES OF THE COMMON LAW”
A. Introduction
2.4 “The rules of the common law” could refer to the rules administered by the common law courts in England prior to the fusion of law and equity in England in 1873. Alternatively, the expression could refer to the non-statutory rules, both legal and equitable, governing contracts.
2.5 It is stated in the current edition of Benjamin’s Sale of Goods4 that the issue “has never been authoritatively determined” in England. The same comment may be made of the law of New South Wales. 5 However, the Victorian Full Court’s decision in Watt v Westhoven6 supports the narrower interpretation of the provision, namely that the rules of equity are not included within the expression “rules of the common law”. Taken to an extreme conclusion this view would prevent the application of equitable rules governing the rectification of sale of goods contracts expressed in written documents, exclude the equitable principles of estoppel, preclude the equitable assignment of the benefit of a sale of goods contract and rule out the possibility of applying equitable principles governing relief against forfeiture in favour of a buyer under a conditional sale. It is scarcely possible to believe that this was intended.
B. Misrepresentation
2.6 The operation of s4(2) has been debated chiefly in relation to issues created by misrepresentations which are not fraudulent. In order to decide whether a buyer (or seller) may rescind a contract ab initio for an innocent misrepresentation, is a court entitled to apply equitable principles, or restricted to the common law? The common law rule, stated by Blackburn J in Kennedy v Panama New Zealand and Australian Royal Mail Co Ltd,7 is that there is no right to rescind unless a “complete difference in substance” between what was obtained and what was represented by the seller or buyer is established. His Lordship gave, as an example of a case where rescission would not be possible, the purchase of a horse following a representation as to its soundness. In the case of an innocent misrepresentation, his Lordship said, the buyer would have no right to rescind. On the other hand, under the general law of contract it seems to be accepted8 that rescission under equitable principles would be available in such a case, provided substantial restitution could be made by the court, and assuming, of course, that the representation induced entry into the contract. Under the general law there is no requirement of a “complete difference in substance”. At most there is a requirement that the representation relate to a material fact.
2.7 In Watt v Westhoven 9 an action was brought for the balance due under a contract for the sale of a motor car. The defence was that the buyer was induced to enter the contract by an innocent misrepresentation which justified rescission of the contract. The defence was held to be unavailable because there was no complete difference in substance between the vehicle as represented and the vehicle delivered. Each member of the Court agreed with the interpretation placed on the “rules of the common law” by the Court of Appeal of New Zealand in Riddiford v Warren10 and held that the words were used in contradistinction to “rules of equity”. Mann ACJ said that the effect of allowing rescission for innocent misrepresentation would be to make every statement inducing the contract a condition, and the Court said that there was nothing in the Goods Act 1928 (Vic) 11 to require it to reconsider a case decided prior to the Act 12 which adopted the doctrine of Kennedy v Panama New Zealand and Australian Royal Mail Co Ltd.13 Similar views were expressed in the Supreme Court of Queensland by Griffith CJ in Hynes v Byrne.14
2.8 In re Wait 15 Atkin LJ said that the “total sum of legal relations(meaning by the word ‘legal’ existing in equity as well as in common law) arising out of the contract for the sale of goods may well be regarded as defined by the Code.” His Lordship went on to say 16 that it would have been “futile” in a statute intended to create an “elaborate structure of rules dealing with rights at law” to have a subsisting set of equitable rights inconsistent with the legal rights. However, in In re Wait the issue was whether sub-buyers of goods (which were future or unascertained goods) obtained an equitable interest in the goods. His Lordship’s statement was approved, tentatively, by the House of Lords in Leigh and Sillivan Ltd v Aliakmon Shipping Co Ltd. 17 In neither case did any issue of misrepresentation arise.
2.9 In a series of English cases courts have proceeded on the basis that rescission ab initio is available under equitable principles in respect of a sale of goods contract induced by innocent misrepresentation.18 Moreover, the Full Court of the Supreme Court of South Australia in Graham v Freer19 refused to adopt the narrow interpretation placed on the “rules of the common law” in Riddiford v Warren and Watt v Westhoven.
2.10 In New South Wales, Street CJ said in Irwin v Poole20 that an innocent misrepresentation “does not form a cause of action..... unless it is a term of the contract between the parties”. However, this statement is directed primarily to the issue of damages rather than rescission, which does not of itself constitute a “cause of action”. And in Leason Pty Ltd v Princes Farm Pty Ltd2l Heisham CJ in Eq could find no authority precluding a decision that the buyer of a racehorse was entitled to rescind the contract for innocent misrepresentation by the seller. Unfortunately there was no discussion by his Honour of whether the Sale of Goods Act 1923 (NSW) permits reliance on equitable principles, beyond saying,22 for the purpose of distinguishing Kennedy v Panama New Zealand and Australian Royal Mail Co Ltd,23 that a “[total] failure of consideration is not now necessary to support an action for innocent misrepresentation”.24 However, the focus of the debate on rescission in the context of sale of goods is whether a total failure of consideration is a necessary element for rescission, because the “rules of the common law” (narrowly interpreted) do not include the rules of equity which permit rescission in cases where there is no such total failure.
2.11 There is no reason in logic why the principles governing rescission for innocent misrepresentation in the law of sale of goods should be different from the general law of contract.
2.12 In Watt v Westhoven Mann ACJ argued that the effect of allowing rescission for innocent misrepresentation would be to make all pre-contractual representations conditions of the contract (see para 2.7). However, that argument is unsound as it confuses termination for breach of condition with rescission ab initio for misrepresentation.25 Where a buyer terminates the performance of the contract for breach of condition the contract is not rescinded and the buyer is able to bring an action for damages. On the other hand, when a contract is rescinded for innocent misrepresentation the contract ceases to exist and there is no right to damages. Although the buyer must allow the seller to recover any goods received from the seller in both cases, that is purely coincidental, and the inability to claim damages for innocent misrepresentation26 is an important feature distinguishing rescission from termination.
III. OTHER JURISDICTIONS
2.13 In the Australian Capital Territory s62(1A) of the Sale of Goods Ordinance 195427 provides:
Nothing in this Ordinance affects, or shall be deemed to have affected, any remedy in equity of the buyer or the seller in respect of a misrepresentation.
This allows equitable principles to be applied in the context of misrepresentation, but it does not expressly preserve equitable principles in other contexts, such as estoppel and relief against forfeiture.
2.14 Section 100(1) of the Goods Act 1958 (Vic) 28 allows rescission of a consumer sale of goods contract in respect of a misrepresentation which was not fraudulent where, if it had been fraudulent, the misrepresentation would have given rise to a right of rescission.
2.15 In no other Australian jurisdiction has the legislation been amended to make it clear that rescission for misrepresentation in a sale of goods context may be based on equitable principles. However, there are examples of statutes in Australia which deal with the right to rescind for misrepresentation.29 These make no mention of special rules for sale of goods but arguably are general in their effect and thereby render the question of interpretation of earlier sale of goods legislation academic. The same is true in England,30 where the Law Reform Committee treated the general principles as applicable to sales of goods. 31 Accordingly no amendment was made to the saving provision of the Sale of Goods Act 1893 (UK) by the Misrepresentation Act 1967 (UK).
IV. RECOMMENDATION ON THE SAVING OF EQUITABLE RULES
2.16 We therefore recommend that the rules of equity relating to rescission for misrepresentation should be expressly preserved for sale of goods.
2.17 If s4(2) of the Sale of Goods Act 1923 (NSW) were to be amended by a general saving of the rules of equity, the narrow interpretation favoured in cases such as Watt v Westhoven would be unarguable and rescission for innocent misrepresentation would be freed from any requirement of a “complete difference in substance” (see para 2.6). However, such a reform would make all equitable principles not inconsistent with the Act potentially applicable. Having regard to statements such as that of Atkin LJ in In re Wait (see para 2.8) and the controversy which has arisen in relation to other matters, such as the application of principles governing relief against forfeiture,32 it would in our view be premature to introduce general equitable principles without a full and detailed consideration of the impact of such principles.33 Accordingly, our recommendations at this stage of the reference will be restricted to innocent misrepresentation.
V. FURTHER ISSUES
2.18 Saving equitable rules in the context of innocent misrepresentation will bring the law applicable to sale of goods contracts into line with that applicable to contracts generally, or at least settle the issue of whether the general principles are applicable to the specific context of sale of goods. In this way there will be uniformity, not only with respect to contract law in New South Wales, but also with those jurisdictions which have chosen to amend the law. However, there are three controversial issues which arise for discussion In consequence, namely.
- the effect of performance of the contract;
- the effect of the misrepresentation being incorporated as a term of the contract;
- whether the right to rescind is lost if the buyer “accepts” the goods.
These issues are dealt with in paras 2.19 to 2.26 below.
A. Performance of the Contract
2.19 The effect of performance, that is execution of a contract, on the right to rescind for misrepresentation has been the subject of considerable debate. Under the so called “rule in Seddon’s case” 34 execution of the contract is a bar to rescission for an innocent misrepresentation. The rule has been applied to executed leases,35 sales of land36 and sales of businesses.37 Although its application to sales of goods was rejected by Helsham CJ in Eq in Leason Pty Ltd v Princes Farm Pty Ltd,38 our recommendation in para 2.16 could, unless qualified, lead to a reconsideration of his Honour’s conclusion.
2.20 It is difficult to find a rationale for the rule in Seddon’s case apart from the proposition that restitutio in integrum is not possible once the representee has had the benefit of performance of the contract. In the context of a sale of goods contract this involves the proposition that the transfer of title to the goods and payment of the price preclude rejection of the goods for innocent misrepresentation. There is a clear connection between this proposition and one rule stated in s 16(3) of the Act, namely that the passing of property in specific goods precludes rejection of the goods for breach of condition. In Chapter 5 of this Report we explain (see especially para 5.21) that this part of s 16(3) is based on two misconceptions: first, that restitutio in integrum is a requirement for an effective election to terminate the performance of a contract for breach of condition; and, secondly, that a buyer’s rejection of specific goods is not effective to revest title in the seller. Although restitutio is a requirement of rescission it is clear that under equitable rules a buyer’s election to rescind for innocent misrepresentation would be effective to revest title in the seller. The result is that substantial restitution-which is all that is required under equitable principles governing misrepresentation39-can be achieved by an order for the repayment of the price subject to an allowance (where appropriate) for intermediate use of the goods or their deterioration in the hands of the buyer. To the extent that rescission for misrepresentation involves a rejection of goods, our recommendation in respect of s 16(3) (see para 5.27) involves disapproval of part of the rationale for the rule in Seddon’s case.
2.21 The rule in Seddon’s case has been the subject of considerable academic40 and judicial41 criticism. Moreover, it was abolished by sl(b) of the Misrepresentation Act 1967 (UK), a reform which has been followed in South Australia42 and the Australian Capital Territory.43 We recommend that rescission of a sale of goods contract for misrepresentation should not necessarily be precluded by the fact that the contract has been performed.
B. Incorporation of the Representation as a Term
2.22 A pre-contractual statement of fact may be incorporated as a term of the contract. In such a situation the statement will almost invariably take effect as a contractual undertaking, rather than a mere representation, in which case its falsity will give rise to a right to claim damages. In addition, if the term is a condition, the breach will give rise to a right to terminate the performance of the contract. This right of termination will also accrue if the term is intermediate in character and the breach has had serious consequences for the other party to the contract (see chapter 3). If the statement of fact induced the contract, and was material, the issue may arise whether the right to rescind for misrepresentation survives the incorporation of the statement as a term. The issue is the subject of conflicting authority. The older cases tend towards a denial of the right of rescission for misrepresentation.44 However, the more recent authorities, particularly in Australia, suggest a contrary view.45 The issue has not been authoritatively determined, except in the context of a fraudulent misrepresentation where it is clear that the right to rescind survives. 46
2.23 In principle there is no reason why incorporation should be a bar to rescission, irrespective of whether there is a right to terminate the performance of the contract for breach of the term, since the two rights are distinct from one another. Section 1 of the Misrepresentation Act 1967 (UK) states that incorporation is not of itself a bar to rescission. This reform has been followed in s6(1)(a) of the Misrepresentation Act 1971 (SA) and by s3 of the Law Reform (Misrepresentation) Ordinance 1977 (ACT). More limited provisions, one of which expressly relates to sale of goods transactions, are to be found in ss100 (2) and 111(2) of the Goods Act 1958 (Vic)47 which state that incorporation is not a bar in respect of consumer sales and leases.
2.24 We therefore recommend that rescission of a sale of goods contract for misrepresentation should not necessarily be precluded by the fact that the misrepresentation has become a term of the contract.
C. Acceptance of Goods
2.25 Section 16(3) of the Act states that “acceptance” of goods precludes the rejection of the goods for breach of condition. The concept of acceptance is considered in Chapter 6 of this Report. In the present context the problem is whether, as Denning LJ considered in Lea v International Galleries,48 rescission if for innocent misrepresentation should be regard as a lesser right than rescission (ie “termination”) for breach of condition. In Leason Pty Ltd v Princes Farm Pty Ltd Helsham CJ in Eq held that acceptance of goods does not, of itself, preclude rescission for misrepresentation. He therefore declined to follow Denning LJ’s statement of the law in Leaf v International Galleries. The basis on which Helsham CJ in Eq’s view can be justified is that rescission and termination are distinct rights (see para 2.23) so that the unavoidability of one right does not necessarily imply that the other is not available. However, to the extent that s38 of the Act reflects general principles of election between rights (see para 6.3) acceptance of goods will frequently imply that the representee has elected to continue with the performance of the contract, that is “affirmed” the contract. In such cases the representee (promisee) will cease to be in a position either to rescind the contract for misrepresentation or to terminate its performance for breach. In Victoria s100(1) of the Goods Act 195849 allows rescission of a consumer sale before, or within a reasonable period after, acceptance of the goods. In all other jurisdictions the relationship between acceptance and the right to rescind remains unsettled. The issue is particularly important where the representation is not incorporated as a term since in such a case the representee will be without any right to claim damages. The English Court of Appeal in Long v Lloyd 50 seems to have held that the right to rescind is lost by acceptance even if the representation is not a term, although the facts of the case are consistent with the representee having elected to affirm the contract notwithstanding existence of facts giving rise to a right to rescind. Be that as it may, it seems particularly unjust for the concept of acceptance, which is arguably intended to apply only to breach of condition, to be used as a basis for denying the right to rescind for misrepresentation.
2.26 Although it can be argued that the issues raised by performance of the contract and the incorporation of a statement as a term of the contract are issues of general contract law, the same cannot be said of the problem of “acceptance”; it is clearly an issue of the scope of s38 of the Act. In any event, all three issues arise mainly in the context of sale of goods contracts and it would in our view be inappropriate to preserve the rules of equity governing innocent misrepresentation without also settling the consequential issues. In the present context we recommend that acceptance should not bar rescission unless there are words or conduct which would amount to affirmation under the general law.
VI. HOW SHOULD THE ACT BE AMENDED?
2.27 The form of the amendment of s4 pursuant to the recommendation suggested in para 2.16 should be such as to make it clear that it is without prejudice to the generality of the words currently contained in s4(2).
2.28 The form which the amendments designed to incorporate the recommendations in paras 2.21, 2.24 and 2.26 should take is a little more difficult. One possibility is to include a statement in s4, perhaps as a proviso to the saving of equitable rules. Another possibility is to add a new subsection to s 16, as that provision deals with restrictions on the rights and remedies of a buyer. Our preference is for an amendment in the first of the two suggested forms.
VII. DAMAGES
2.29 No attempt has been made to confer a right to damages for innocent misrepresentation as that is clearly an issue of general contract law. However, now that recommendations have been made in respect of the other issues-Seddon’s Case and incorporation-but limited to the sale of goods context, there would be considerable advantage in a reference being given to the Commission on whether there should be a general Misrepresentation Act.
FOOTNOTES
1. See now Sale of Goods Act 1979 (UK) s62(2).
2. See para 2.6-2.7.
3. See para 2.4-2.12.
4. (2nd ed 1981) para 7.
5. In Hewett v Court (1983) 149 CLR 639 the High Court left open for future decision whether the sale of goods legislation precludes the creation of equitable liens by operation of law in respect of a sale governed by the legislation. See also para 2.8.
6. [1933] VLR 458, see further para 2.7.
7. (1867) LR 2 QB 580 at 587
8. See Treitel, The Law of Contract (6th ed 1983) pp280-281: Lindgren, Carter and Harland, Contract Law in Australia (1986) para 1127.
9. [1933] VLR 458.
10. (1901) 20 NZLR 572 at 576-577, 579, 582, 584. See also Taylor v Combined Buyers Ltd [1924] NZLR 627 at 638; Holmes v Burgess [1975] 2 NZLR 311 at 317. But cf Thomas Borthwick and Sons (Australasia) Ltd v South Otago Freezing Co Ltd [1978] 1 NZLR 538 at 545.
11. See further para 2.14.
12. Picturesque Atlas Publishing Co Ltd v Phillipson (1890) 16 VLR 675 at 680.
13. (1867) LR 2 QB 580 (see para 2.6).
14. (1899) 9 QLJ 154 at 159-163 (affirmed without reference to the point (1899) 9 QLJ 198).
15. [1927] 1 Ch 606 at 635.
16. [1927] 1 Ch 606 at 635, 636. See also King v Greig [1931] VLR 413 at 431-432. But see W Goodhart and G Jones, “The Infiltration of Equitable Doctrine into English Commercial Law” (1980) 43 Mod LR 489.
17. [1986] 2 WLR 902 at 911.
18. See Leaf v International Galleries [1950] 2 KB 86, esp at 90-91, 94-95; Long v Lloyd [1958] 1 WLR 753; Goldsmith v Rodger [1962] 2 Lloyd’s Rep 249.
19. (1980) 35 SASR 424. And see Timmerman v Nervina Industries (International) Pty Ltd [1983] 1 Qd R I at 7 (reversed without reference to the point t 1 9831 2 qd R 26 1).
20. (1953) 70 WN (NSW) 186 at 187. See also Marks v Hunt Bros (Sydney) Pty Ltd (1958) 58 SR (NSW) 380 at 383.
21. [1983] 2 NSWLR 381. See further para 2.19.
22. [1983] 2 NSWLR 381 at 384.
23. (1867) LR 2 qB 580 (para 2.6).
24. Couched in such terms his Honour’s statement is arguably inconsistent with Street CJ’s comment in Irwin v Poole (1953) 70 WN (NSW) 186 at 187. With respect, it would have been sufficient for Helsham CJ in Eq to say that rescission can take place even though there is no total failure of consideration.
25. See also para 2.20.
26. In the Australian Capital Territory and South Australia the court may award damages for an innocent misrepresentation, which would be assessed on a tortious, rather than contractual, basis: see note 29.
27. Added by s5 of the Sale of Goods Ordinance 1975 (ACT).
28. Added by s2 of the Goods (Sales and Leases) Act 1981 (Vic).
29. See Law Reform (Misrepresentation) Ordinance 1977 (ACT); Misrepresentation Act 1971 (SA). See also Contractual Remedies Act 1979 (NZ) s26.
30. See Misrepresentation Act 1967 (UK). And see Treitel, The Law of Contract (6th ed 1983) pp285-286.
31. England Law Reform Committee, Innocent Misrepresentation, 10th Report, Cmnd 1782 (1962).
32. See Stockloser v Johnson [1954] 1 qB 476 at 487-488, 492, 499.
33. We note in passing that c14(b) of the Draft Bill attached to the New South Wales Law Reform Commission’s Working Paper on the Sale of Goods (WP 13 1975) proposed such an amendment and that no criticism of this reform was made in comments on the Working Paper received by the Commission.
34. Seddon v North Eastern Salt Co Ltd [1905] 1 Ch 326.
35. Angel v Jay [1911] 1 KB 666. But cf Solle v Butcher [1950] 1 KB 671 (mistake).
36. See Wilde v Gibson (1848) 1 HLC 605; 9 ER 897. Cf Svanosio v McNamara (1956) 96 CLR 186 (mistake).
37. Vimig Pty Ltd v Contract Tooling Pty Ltd (unreported) 18 April 1986, Supreme Court of New South Wales, Wood J.
38.[1983] 2 NSWLR 381. See also Leaf v International Galleries [1950] 2 KB 86 at 90.
39. See Alati v Kruger (1955) 94 CLR 216.
40. See, eg Treitel, The Law of Contract (6th ed 1983) p288; Sutton, Sales and Consumer Law in Australia and New Zealand (3rd ed 1983) pp11-14.
41. See the cases cited in para 2.19.
42. Misrepresentation Act 1971 (SA) s6(l)(b).
43. Law Reform (Misrepresentation) Ordinance 1977 s3.
44. See Pennsylvania Shipping Co v Compagnie Nationale de Navigation [1936] 2 All ER 1167. Cf Holmes v Burgess [1975] 2 NZLR 311 at 317.
45. See Academy of Health and Fitness Pty Ltd v Power [1973] VR 254; Simons v Zartom Investments Pty Ltd [1975] 2 NSWLR 30. For an older authority see Compagnie Francaise des Chemins de Fer Paris-Orleans v Leeston Shipping Co Ltd (1919) 1 L1 L Rep 235.
46. See Alati v Kruger (1955) 94 CLR 216 at 222.
47. Added by s2 of the Goods (Sales and Leases) Act 1981 (Vic).
48. [1950] 2 KB 86 at 90-9 1. See also Long v Lloyd [1958] 1 WLR 753.
49. Added by s2 of the Goods (Sales and Leases) Act 1981 (Vic).
50. [1958] 1 WLR 753
