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LIABILITY FOR PRE-CONTRACTUAL MISSTATEMENTS
Nicholas Rafferty*
I. Introduction
Until the House of Lords decision in Hedley Byrne & Co. Ltd. v. Heller & Partners Ltd.' in 1963, the lack of any general remedy for negligent misstatements causing purely financial loss meant that a party, induced to enter into a contract by another's misrepresentations, was inadequately protected. A claim for damages suffered was liable to be met by those twin pillars of classical law, namely Derry v. Peek2 and Heilbut, Symons & Co. v. Buckleton.3^ The first case decided expressly that simple negligence was insufficient to constitute the tort of deceit as there had to be actual dishon- esty on the part of the defendant4 and impliedly that there was no liability at all for merely negligent misstatements.5 Thus, Lord Bramwell said that: "To found an action for damages there must be a contract and breach, or fraud."6 The second case limited relief in contract by demanding that an intention, on the part of the representor, that a statement should constitute a contractual term be proved strictly, especially where there was a written contract between the parties.' Lord Moulton said that it was of the utmost importance for the House of Lords to "maintain in its full integrity the principle that a person is not liable in damages for an innocent misrepre- sentation, no matter in what way or under what form the attack is made." Whilst equity alleviated the representee's position through the remedy of rescission, no damages could be claimed in equity and rescission itself could be barred for a number of different reasons.
This paper examines the remedies available to a party who has been induced to enter into a disadvantageous contract through another's misre- presentations. It deals first with contractual remedies and shows that contractual liability is so hidebound by restrictions that it fails to meet the needs of the representee in these circumstances. Moreover, it demonstrates that a contractual remedy may often be an inappropriate way of resolving the problem. Contractual damages may sit uneasily where the basis of the plaintiffs claim is that he, by entering into the contract, has relied upon the defendant's misrepresentations to his detriment rather than that the
- Professor of Law, University of Calgary. I. [1964] A.C. 465 (H.L.).
- (1889), 14 App. Cas. 337 (H.L.).
- [1913] A.C. 30 (H.L.). 4. Supra n. 2, at 374 (per Lord Herschell).
- This was certainly the interpretation favoured by the Court of Appeal just four years later in Le Lievre v. Gould, [ 18931^ I Q.B. 491 where Lord Esher M.R. said at page 498: But negligence, however great, does not of itself constitute fraud. The official referee ... came to the conclu- sion that the defendant, though he had acted negligently, had not wilfully made any false statement, or been guilty of any fraud. All that he had done was to give untrue certificates negligently. Such negligence, in the absence of contract with the plaintiffs, can give no right of action at law or in equity. 6. Supra^ n. 2, at 347.
- See generally: Greig, "Misrepresentations and Sales of Goods" (1971), 87 L.Q. Rev. 179. 8. Supra n. 3, at 51.
9. The remedy of rescission is discussed briefly in section I1.B. of this paper, infra.
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defendant has guaranteed the truth of his representations.10 Rescission, on the other hand, even where available, may often be seen as too draconian in that it requires the whole transaction to be upset."
This paper then proceeds to examine tortious liability for precontractual misstatements. It concentrates on the tort of negligent misstatement, trac- ing its development as a remedy for pre-contractual misrepresentations. It discusses the obstacles which still remain to the employment of this cause of action. Taking the view that in many cases this new tort provides the most satisfactory way of protecting the representee, it raises the hope that such obstacles can be overcome.
H. Contractual Liability
In contract, a representee may claim that a certain statement consti- tutes a contractual term for breach of which damages can be recovered, or may seek to rescind the contract in equity on the ground of misrepresen- tation. Each of these courses of action is discussed in turn.
A. Damages for Breach of Contract
1. Parol Evidence Rule
Where a contract has been recorded in writing, a plaintiff, in order to recover damages for breach of contract, will be forced to contend with the parol evidence rule.12 The classic formulation of that rule was given by Lord Denman C.J. in Goss v. Lord Nugent: By the general rules of the common law, if there be a contract which has been reduced into writing, verbal evidence is not allowed to be given of what passed between the parties, either before the instrument was made, or during the time that it was in a state of prepara- tion, so as to add to or subtract from, or in any manner to vary or qualify the written contract;"
Where the rule is applied, a plaintiff will be unable to argue successfully that the defendant's pre-contractual representations constituted terms of the contract between the parties. He will be denied a contractual claim for damages. A plaintiff's position, therefore, may depend upon how strictly a particular court applies the rule.
The English courts have been prepared to treat the rule as more in the nature of a common sense presumpution that a document which looks like a contract is to be regarded as embodying the entire contract between the parties." A plaintiff, however, has two avenues open to him to rebut such a presumption. First, he may be able to convince a court that certain oral representations constitute a contract collateral to the written contract. Sec- ondly, he may be able to establish that there is a single contract between the parties which is partly written and partly oral. The fact that there is
- See generally: Taylor, "Expectation, Reliance and Misrepresentation" (1982), 45 Mod. L. Rev. 139; Reiter, "Contracts, Torts, Relations and Reliance" in Studies in Contract Law (Reiter and Swan ed. 1980) 253-255.
- Reiter, ibid.
- See generally: Treitel, The Law of Contract (5th ed. 1979) 135-143; McLauchlan, The^ Paroi Evidence Rule (^ 1976).
- (1833), 5 B. & Ad. 58 at 64-65, 110 E.R. 713 at 716 (K.B.).
- Wedderburn, "Collateral Contracts", 119591 Camb. L.J. 58 at 61-64; McLauchlan, supra^ n. 12 at 50-52.
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they do not differ in respect of their possessing to the full the character and status of a contract."
One effect of this judgment was to open up the possibility of establishing a collateral contract in respect of any kind of precontractual oral statements. Simple representations about the subject-matter of a written contract, for example, could be and were classified as collateral contracts.28 Another effect of the judgment, however, was to obscure the distinction between collateral contracts and warranties through its definition of a warranty as "a contract collateral to the main contract".26 A warranty is not in itself a separate contract but is one of the terms of a single contract. It is a collateral term in the sense that it is "collateral to the express object of'27 the contract of which it forms a part but it is not automatically a collateral contract. The equation of a warranty with a collateral contract seems to have been the result of Lord Moulton's belief in the strict nature of the parol evidence rule and his distrust of oral evidence generally. Combined with his emphasis upon the need to establish clearly an intention to warrant, which is discussed below,29 he saw the collateral contract as a limiting device to be used very sparingly to amend the parties' written agreement:
But such collateral contracts must from their very nature be rare ... Such collateral con- tracts, the sole effect of which is to vary or add to the terms of the principal contract, arc ... viewed with suspicion by the law. They must be proved strictly. Not only the terms of such contracts but the existence of an animus contrahendi on the part of all the parties to them must be clearly shewn. Any laxity on these points would enable parties to escape from the full performance of the obligations of contracts unquestionably entered into by them and more especially would have the effect of lessening the authority of written contracts.. .ao
He would have been surprised by the alacrity with which the device was seized to grant relief in respect of pre-contractual oral representations.31 By using the device of the collateral contract in these circumstances, later courts were able to convince themselves that the parol evidence rule was being upheld.^32
Arguably, there is still a serious limitation upon the use of the collateral contract to evade the parol evidence rule. It has often been asserted that a collateral contract cannot be established if its terms would contradict those of the written contract.33 There are signs that this limitation is being increasingly ignored, at least in England. In City and Westminster Proper-
24. /bid., at 47.
- For example, Webster v. Higgin, 119481 2 All E.R. 127 (C.A.);^ Dick Bentley Productions. Ltd. v. Harold Smith (Motors), Ltd., [ 19651 2 All E.R. 65 at 68 (per Salmon L.J.) (C.A.). See generally: Greig,^ supra^ n. 7, at 185-189. 26. Supra n. 3, at 47. 27. Chanter v. Hopkins (1838), 4 M. & W. 399 at 404, 150 E.R..1484 at 1486^ (per^ Lord Abinger C.B.) (Exch. D.).
- On the distinction between collateral contracts and warranties, see Wedderburn,^ supra^ n. 14 at 64-67 and McLauchlan, supra n. 12 at 90-94.
- Section 11.A.2. of this paper. 30. Supra n. 3, at 47.
- See Esso Petroleum Co. Ltd. v. Mardon, 11976] Q.B. 801 at 817. (per Lord Denning M.R.).
- This point was made succinctly by Wedderburn, supra n. 14, at 69, where he wrote: ... lilt is clear that a division of a transaction into (i) main written contract and (ii) collateral oral contract eases the conscience of those who believe that the parol evidence rule is a strict and meaningful prohibition. After all, the written contract is not varied, added to, or contradicted. It stays intact — quite a different answer from that which a'one-contract' analysis demands.
- For example, Erskine v. Adeane, supra n. 20, at 766 (per Mellish L.1.). See generally: McLauchlan, supra n. 17.
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ties (1934) Ltd. v. Mudd,34 for example, a tenant was induced to sign a lease, containing a covenant that the premises would be used for business purposes only, by the landlord's oral assurance that it would not object to the tenant sleeping on the premises as he had done in the past. Harman J. held that "there was a clear contract acted upon by the [tenant] to his detriment and from which the [landlord] cannot be allowed to resile." Unfortunately, there was no consideration in this case of the leading author- ities on collateral contracts and so its stature is in some doubt. Ideally, the fact of contradiction should just be another factor in the determination of whether an alleged collateral agreement was in fact made. Clearly it will be easier for a party to establish the existence of a collateral contract which merely adds terms to the written contract. In the case of a direct contra- diction with a later written contract, a defendant always has the strong argument that the parties had agreed to set aside any prior oral assurances as exemplified by their execution of a written contract inconsistent with such assurances. Professor McLauchlan has convincingly shown that there is no need to rely upon what may often be the fiction of a collateral contract in order to obviate the parol evidence rule.3fi He points out that "there is a written contract for the purpose of the application of the rule only when the writing is intended by the parties as a contractual document which is to contain all the terms of their agreement."37 The parol evidence rule creates a pre- sumption that a document containing contractual terms embodies the complete contract between the parties. As has been pointed out earlier, the fact that the alleged oral representations were omitted from the writing is directly relevant to the issues of whether the oral statements were in fact made and, if so, of whether they were intended to have contractual effect. A court, however, should always listen to the argument of one party that the document in question was not intended to contain the whole contract and that the contractual terms are partly written and partly oral.
Professor McLauchlan has isolated the factors which will assist a court in its determination of whether the writing should be regarded as the entire contract.^38 Such factors include, (1) the nature of the writing38 — the more formal and detailed the writing, the less likely the courts will be to allow it to be amended by oral evidence; (2) whether the document has been signed" — where a document has been signed by both parties, it is more likely to be regarded as the complete contract between the parties; (3) the status of the parties41 — businessmen, for example, are much more likely than others to want to record their contracts entirely in writing; (4) the preparation of the document42 — where both parties have participated in drafting the
- [1959] Ch. 129. 35. /bid., at 145-146.
- McLauchlan, supra n. 12. 37. /bid., at 143. 38. /bid., at 58-79. 39. /bid.,^ at 59-63. 40. /bid., at 63-64. 41. /bid., at 64-65. 42. Ibid., at 65.
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The other interesting aspect of Mendelssohn (^) is that the oral assurance was allowed to override one of the printed conditions. Obviously, it will be easier for a court to give effect to oral terms which are merely in addition to the written part of the contract, but there is no requirement that the oral and written portions must be consistent with each other. The fact of con- tradiction is just one of the factors in the determination of whether a particular assurance was given and, if so, whether it was intended to have contractual effect and to have survived the inconsistent writing. The par- ticular term contradicted will also be relevant. A court will be especially ready, for example, to hold that a widely-drawn exemption clause must be read subject to some oral undertaking given at the time of contracting.
Mendelssohn helps to put into perspective some earlier decisions, such as Couchman v. Hill. 47 In that case, the plaintiff purchased, at an auction sale, the defendant's heifer which had been described in the sale catalogue as "unserved". That document also stated that the sale would be subject to the auctioneer's usual conditions and that all lots had to be taken "subject to all faults or errors of description". The auctioneer's usual conditions provided that the lots were sold "with all faults, imperfections and errors of description". At the time of the sale, the plaintiff had asked both the auctioneer and the defendant whether they could confirm that the heifer was unserved and they had each assured him that it was. Later, the heifer was found to be in calf and died as a result of carrying a calf at too young an age. The plaintiff sued the defendant for breach of warranty. The Court of Appeal held that the oral assurances given at the time of the auction took precedence over the printed exclusion clauses. Scott L.J. said: [T]here was clearly an oral offer of a warranty which overrode the stultifying condition in the printed terms: that offer was accepted by the plaintiff when he bid, and the contract was made on that basis when the lot was knocked down to him"
The clearest statement delimiting the application of the parol evidence rule, and one entirely in accordance with McLauchlan's analysis, is con- tained in J. Evans & Son (Portsmouth) Ltd. v. Andrea Merzario Ltd..49 The plaintiff was an importer of machines from Italy. Since 1959, it had con- tracted with the defendant, which was a forwarding agent, to arrange for the carriage of goods to England. The contract between the parties was on the basis of the printed standard conditions of the forwarding trade. Prior to 1967, the defendant had arranged for the goods to be carried in crates below deck because of the possibility of corrosion if carried on deck. In 1967, the defendant proposed to arrange for the carriage of goods in the future by containers. The plaintiff agreed to such a changeover after being assured by the defendant that its goods would continue to be shipped below deck. Nothing was put into writing concerning the assurance and the parties continued to operate on the basis of the standard conditions. About a year later, a container was carried on deck and a machine belonging to the plaintiff was lost overboard. The plaintiff claimed damages for breach of
- [ 1947] K.B. 554 (C.A.). See also. Harling v. Eddy, 119511 2 K.B. 739 (C.A.). 48. Ibid., at 558.
- [ 1976] 2 All E.R. 930 (CA.).
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the oral assurance. The defendant argued that it had given no contractual promise that the plaintiff's goods would be carried below deck and relied upon the printed conditions. These conditions gave the defendant complete freedom to choose the means to be followed in the transportation of goods, restricted its liability to cases of wilful neglect or default, and limited its liability to fifty pounds per ton. The Court of Appeal unanimously held in favour of the plaintiff. Roskill L.J. dealt directly with the problem of the parol evidence rule and rejected the defendant's contention that that rule precluded the admission of evi- dence concerning the oral assurance: But that doctrine [the parol evidence rule], ... has little or no application where one is not concerned with a contract in writing (with respect, I cannot accept counsel for the defend- ants' argument that there was here a contract in writing) but with a contract which, as I think, was partly oral, partly in writing and partly by conduct. In such a case the court does not require to have recourse to lawyers' devices such as collateral oral warranty in order to seek to adduce evidence which would not otherwise be admissible. The court is entitled to look at and should look at all the evidence from start to finish in order to see what the bargain was that was struck between the parties.
The only issue, therefore, was of delineating the terms of the contract reached between the parties and in determining that issue all evidence was relevant. Roskill L.J. decided that there was every reason to treat the oral assurance as an enforceable contractual promise and not to rely solely upon the printed terms because of the evidence to the effect that the plaintiff was willing to accept the changeover to container transportation only if the defendant promised that such containers would be carried below deck. There was no need to find a collateral contract in order to do justice between the parties. It was possible to find a single contract, composed of both oral and written terms. Roskill L.J. was, however, faced with the contradiction between the oral promise and the printed terms. This was a question of construction which he resolved in favour of the oral assurance because otherwise the defendant's promise would have been "wholly illusory". In a brief judgment, Geoffrey Lane L.J. took the same approach as Roskill L.J. whilst Lord Denning M.R. used the device of the collateral contract to reach the same conclusion as his brethren. Whichever approach is adopted in the future, the case shows that the English courts will not be precluded by the parol evidence rule from granting relief in appropriate cases for breach of oral promises.
In Canada, the lower courts have followed much the same path as their English counterparts. The collateral contract has been seized upon with alacrity as a means of obviating the rigours of the parol evidence rule. There has even been some acceptance of the notion that such a contract, in an appropriate case, can contradict the terms of a written contract. In (^) Ronald Elwyn Lister Ltd. v. Dunlop Canada Ltd.,52 for example, Rutherford J. said at trial:
50. Ibid., at 934-935. 51. /bid., at 935.
- (^) (1978), 85 D.L.R. (3d) 321 (Ont. H.C.); rev'd (1979), 105 D.L.R. (3d) 684 (C.A.); rev'd (1982), 135 D.L.R. (3d) (S.C.C.).
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guarantee and to cover existing as well as future indebtedness of the com- pany up to the sum of six thousand dollars. It also stated that the guarantor could determine his further liability under the guarantee only by notice in writing to the bank and contained a clause to the effect that the guarantor acknowledged that no representations had been made to him on behalf of the bank. The defence was that, when he signed the guarantee, the defend- ant had received an oral assurance from the plaintiff's assistant branch manager that the guarantee would cover only existing debts of the company and that he would be released from his guarantee when the bank had obtained a joint guarantee from the directors of the company. Such a joint guarantee was acquired some six months after the defendant had executed his guarantee.
The Supreme Court decided in favour of the bank. Such a decision was understandable. There was little reason to feel sympathetic towards the defendant, a solicitor, who had failed even to read the guarantee before signing it. If the Court had concluded simply that the alleged oral assurance had not been made or that its exclusion from the contradictory written guarantee indicated that it was not intended to have contractual effect,6° the decision would have been quite unexceptional. Unfortunately, the def- ence was rejected on purely technical grounds. The Court recognized that parol evidence was admissible to establish an independent collateral con- tract but held, relying on nineteenth century English81 and Canadian^62 authority, that such a collateral agreement could not be established where it would contradict the main contract. Here the contradictions were numerous.
For more than ten years, Hawrish seems to have been regarded as an aberration because it was ignored consistently. In particular, oral assurances were allowed to override written exemption clauses.83 In 1980, however, the Supreme Court affirmed the position it had taken in Hawrish in Bauer v. Bank of Montreal.64 The defendant guarantor guaranteed his company's debts to the plaintiff bank which also took an assignment of the company's book debts. The written guarantee provided that the bank, without releasing the guarantor, could "abstain from taking securities from, or from perfect- ing securities of," the company. The bank neglected to register the assignment of book debts with the result that the security was lost to other creditors. The bank brought an action to enforce the guarantee and the defendant relied inter alla on an oral understanding that the accounts would be pre- served for the benefit of the guarantor and would be assigned to him on payment of the company's debts. The Court, following Hawrish, held that evidence of such an understanding was inadmissible under the parol evi-
- The Court did doubt whether there was any such intention but did not ground its decision on such a conclusion, (^) ibid., at
61. Lindley v. Lacey, supra^ n. 18;^ Morgan v. Griffith, supra^ n. 20: Erskine v. Adeane, supra^ n. 20. 62. Byers v. McMillan (1887), 15 S.C.R. 194.
- For example, Francis v. Trans-Canada Trailer Sales Ltd. (1969), 6 D.L.R. (3d) 705 (Sask. CA.); Sodd Corporation Inc. v Tessis, supra n. 57; Westridge Developments Ltd. v. Can-Am Development Corp. Ltd., (^) 119781 5 W.W.R. 404 (Alta. S.C.): Roberts v. Monies Development Corp., supra n. 57; dicta by the Trial Judge in Ronald Elwyn Lister Ltd. v. Dunlop Canada Ltd., supra n. 52.
- (1980),110 D.L.R. (3d) 424.
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dence rule because it "would clearly contradict the terms of the guarantee which. .. gave the bank the right to abstain from registration and perfec- tion of security."
The Supreme Court reiterated its views just two years later in (^) Carman Construction Ltd. v. Canadian Pacific Ry. Co.." (^) The plaintiff contractor entered into a contract with the defendant for the excavation and removal by the plaintiff of a section of rock. In submitting its bid, the plaintiff had relied upon an oral representation by one of the defendant's employees as to the quantity of rock to be removed. It transpired that there was a great deal more rock to be removed than had been represented with the result that the plaintiff incurred substantial additional expense. The plaintiff brought an action, inter alia, for breach of a collateral warranty as to the quantity of rock to be removed. The defendant relied upon the terms of the written contract and, in particular, on clause 3.1 which provided: It is hereby declared and agreed by the Contractor that this Agreement has been entered into by him on his own knowledge respecting the nature and conformation of the ground upon which the work is to be done, the location, character, quality and quantities of the material to be removed, the character of the equipment and facilities needed, the general and local conditions and all other matters which can in any way affect the work under this Agreement, and the Contractor does not rely upon any information given or statement made to him in relation to the work by the Company.
Both at trial and on appeal the Ontario courts dismissed the plaintiff's claim, with no consideration of the parol evidence rule, on the basis that it was bound by that clause. The Supreme Court, however, after deciding that no collateral contract existed because there was no intention to warrant the accuracy of the estimate and because of the exclusion clause, could not resist invoking the parol evidence rule in the defendant's favour. Martland J., for the Court, said: There is an additional ground for denying the existence of a collateral warranty. Such a warranty, if it existed, would contradict the express terms of the contract as contained in cl. 3.1. This court has held in (^) Hawrish v. Bank of Montreal87 ... that a collateral agreement cannot be established where it is inconsistent with or contradicts the written agreement e
The Court also cast doubt on the possibility of finding a contract to be partly written and partly oral. Following Heilbut, Symons & Co. v. Buck- leton,69 a collateral warranty was equated with "a contract collateral to the primary agreement."
This line of Supreme Court authority makes the parol evidence rule a much more formidable barrier to be overcome in Canada than in England by a potential plaintiff. If followed slavishly,71 there is the danger that such an approach will preclude, on technical grounds, a full examination of all
65. /bid., at 431-432.
- (1982), 136 D.L.R. (3d) 193 (S.C.C.); affg (1981), 124 D.L.R. (3d) 680 (Ont. C.A.); affg (1980), 109 D.L.R. (3d) 288 (Ont. H.C.). 67. Supra n. 59. 68. Supra n. 66, at 201. 69. Supra n. 3. 70. Supra n. 66, at 198.
- It was followed recently in Bank of Nova Scotia v. Zackheim (1983), 149 D.L.R. (3d) 555 (Ont. H.C.).
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defendant had assumed responsibility for the truth of his statements. Initially, the defendant must have said expressly "I warrant" in order to incur lia- bility but later it was sufficient that the defendant had made a statement of fact. As recently as 1901, the English Court of Appeal in De Lasalle v. Guildford's had stated that "a decisive test" for determining a warranty: [ l is whether the vendor assumes to assert a fact of which the buyer is ignorant, or merely states an opinion or judgment upon a matter of which the vendor has no special knowledge, and on which the buyer may be expected also to have an opinion and to exercise his judgment."
Such a test was rejected in Heilbut Symons, the only true test being one of contractual intention.
In determining whether a statement was intended to constitute a con- tractual term, the courts use an objective test. Thus, Denning L.J., as he then was, said in Oscar Chess, Ltd. v. Williams: It is sometimes supposed that the tribunal must look into the minds of the parties to see what they themselves intended. That is a mistake ... The question whether a warranty was intended depends on the conduct of the parties, on their words and behaviour, rather than on their thoughts. If an intelligent bystander would reasonably infer that a warranty was intended, that will suffice." In applying the objective test, the courts have isolated a number of factors to assist them in the determination of the parties' intentions. Clearly, the actual words used can be very relevant.^7 s Rarely, however, will the maker expressly "warrant" the truth of his statements and so other factors will have to be considered. In the last section, it was seen that if the contract appears to be contained in a document, then the exclusion of oral statements from that document will be strong evidence that they were not intended to form part of the contract. This was clearly an important factor in Heilbut, Symons80 itself where Lord Moulton warned of the danger of "lessening the authority of written contracts by making it possible to vary them by suggesting the existence of verbal collateral agreements relating to the same subject-matter."81 In Ronald Elwyn Lister Ltd. v. Dunlop Canada Ltd.,^82 one reason why Rutherford J. at trial refused to regard certain oral assur- ances as contractual terms was because he felt that they would have been included in the final written agreement if the parties had intended that they be binding. In Oscar Chess, Ltd. v. Williams,83 Denning L.J. said: If an oral representation is afterwards recorded in writing, it is good evidence that it was intended as a warranty. If it is not put into writing, it is evidence against a warranty being intended:"
He agreed, however, that such a factor was not decisive.
- [19011 2 K.B.215. 77. /bid., at 221.
- [19571 I All E.R. 325^ at^ 328 (C.A.). _79. Ibid.
- Supra_ n. 3. 81. /bid., at^ 47. 82. Supra n. 52. 83. Supra n. 78. 84. Ibid., at 329.
- See also Esso Petroleum Co. Ltd. v. Mardon, supra n. 31, at 824 (per Ormrod L.J.) (C.A.).
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Another consideration will be the time at which the statement in ques- tion was made. The longer the time interval between the making of the statement and the formation of the contract, the less likely is the statement to be regarded as a term of the contract.^86 Again, of course, the length of time elapsed can never be conclusive in any way.87 Similarly the importance of the topic covered by the statement is relevant. If the plaintiff would not have contracted at all without receiving the assurance in question, then the more likely it is for such an assurance to be regarded as a term.e^8 In practice, the most important consideration has been the skill and knowledge of the respective parties. If the maker of the statement possesses a special skill or knowledge compared with the representee, it will be more reasonable to infer that he was assuming contractual responsibility for its truth. This is especially true where one party asserts as a fact some matter which should be within his own knowledge. In Oscar Chess Ltd. v. Wil- liams,89 for example, the defendant wished to obtain from the plaintiff car dealership a new car on hire-purchase and to offer a secondhand Morris in part exchange. The defendant described the Morris as a 1948 model and produced the registration book to support his claim. The transaction was then concluded. Eight months later, the plaintiff discovered that the car was in fact a 1939 model and sued for breach of contract. A majority of the Court of Appeal held that no warranty should be inferred on those facts. The seller had no personal knowledge of the year of the car but was relying solely on the registration book. In those circumstances, the reasonable infer- ence was that the seller was not intending to assume responsibility for the truth of his statement. Denning L.J. said: When the seller states a fact which is or should be within his own knowledge and of which the buyer is ignorant, intending that the buyer should act on it and he does so, it is easy to infer a warranty;. If, however, the seller, when he states a fact, makes it clear that he has no knowledge of his own but has got his information elsewhere, and is merely passing it on, it is not so easy to imply a warranty." Oscar Chess should be contrasted with Dick Bentley Productions Ltd. v. Harold Smith (Motors) Ltd.,91 where the defendant car dealer falsely informed the plaintiff, a prospective purchaser, that the car in question had done only 20,000 miles since it had been fitted with a new engine and gearbox. In that case, the Court had no doubt that the defendant's state- ment constituted a contractual term. The seller was clearly in a better position than the buyer to know or find out whether the representation was true.^92 In a similar vein, there is the more recent decision of the English Court of Appeal in Esso Petroleum Co. Ltd. v. Mardon.83 Esso negotiated with
- This was one of the relevant factors in the decision against a warranty in Howard Marine & Dredging Co. Ltd. v.^ A. Ogden & Sons (Excavations) Ltd., [ 1978] Q.B. 574 (CA.).
- For example, El/ul v. Oakes (1972),^ 3 S.A.S.R. 377 (S.C.).
- For example, J. Evans & Son (Portsmouth) Ltd. v. Andrea Merzario Ltd., supra^ n. 49 which has been discussed in detail in section I I.A.I. of this paper. 89. Supra n. 78. 90. /bid.,^ at 329. 91. Supra n. 25.
- See also Roberts v. Montex Development Corp., supra n. 57. 93. Supra n. 31.
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did it myself — that the misrepresentation was fraudulent, or alternatively a collateral warranty. At the trial we nearly always succeeded on collateral warranty... Besides that experience, there have been many cases since I have sat in this court where we have readily held a representation — which induces a person to enter into a contract — to be a warranty sounding in damages.
A plaintiff, therefore, can often succeed in an action for breach of contract where the basis of his claim is that he has relied on the defendant's representations to his detriment by entering into a disadvantageous contract rather than that the defendant has guaranteed the truth of his representa- tions.88 The contractual action is being used to enforce what is fundamentally a tortious claim. In New Zealand, this position has been entrenched by statute. Section 6(1) of the Contractual Remedies Act 197999 provides:
If a party to a contract has been induced to enter into it by a misrepresentation, whether innocent or fraudulent, made to him by or on behalf of another party to that contract — (a) He shall be entitled to damages from that other party in the same manner and to the same extent as if the representation were a term of the contract that has been broken; and (b) He shall not, in the case of a fraudulent misrepresentation, or of an innocent misre- presentation made negligently, be entitled to damages from that other party for deceit or negligence in respect of that misrepresentation.
It is understandable to treat representations inducing a contract as contractual terms in order to provide a measure of relief to a representee. As discussed below, however, relief in tort is now available in the majority of these cases1O0 and so no longer need the law of contract be strained, whether at common law or by statute, so as to protect a representee. Con- tractual damages may be inappropriate in such a case. The normal contractual measure of damages is the expectation interest. The plaintiff is entitled to be put into the position in which he would have been if the contract had been performed, namely the representations had been true. He is to be granted the benefit of his bargain. In tort, on the other hand, the plaintiff is entitled to his "out of pocket" losses. He is to be placed in the position he would have occupied if the tort had not been committed, namely the representations had not been made.1O1 The tortious measure is clearly the more appropriate where the plaintiff is arguing that the defend- ant, through his misrepresentations, has caused the plaintiff to suffer loss by entering into a contract.'°^2
It is true that courts, where they believe it to be fitting, have been able to award the tortious measure of damages in a contractual action by finding that the term broken was a promise to use reasonable care in making the statements. Such a case was Esso Petroleum Co. Ltd. v. Mardon103^ where
97. Ibid.. at 817.
- See generally: Taylor, supra n. 10.
- 1979, No. 11.
- Tortious relief would not be available in the exceptional case where a plaintiff could not prove negligence on the part of the representor. 10I. See Taylor, supra n. 10: Treitel, supra n. 12, at 266-269.
- See Taylor, supra n. 10; Reiter, supra n. 10 at 260-263. 103. Supra n. 31.
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the English Court of Appeal determined that Esso had not guaranteed that the throughput of petrol would be 200,000 gallons but it had made an estimate upon which it was reasonable for Mardon to rely. The Court, therefore, constructed a warranty consisting of a promise by Esso that it had used reasonable care in formulating its forecast. In this and similar cases, however, it would make more sense to found liability solely in tort and to impose contractual liability only where it is appropriate for the plaintiff to be compensated for his loss of bargain.
B. Rescission for Misrepresentation
A victim of a pre-contractual misrepresentation may be able to rescind the ensuing contract between the parties and thereby restore the status quo. This equitable remedy will rarely, however, prove to be the most satisfactory way of protecting a representee. In the first place, a representee may feel that he is best served by the recovery of damages but, to claim damages, he will have to establish that a breach of contract or a tort has been com- mitted. In rescinding, a representee may be able to claim an indemnity from the representor in respect of obligations created by the contract,'°^6 but such an indemnity is only a part of the process of rescission and does not resemble damages in any way. In England, by statute, a court may award damages in lieu of rescission,107 but no such option is available to a Canadian court.
Secondly, rescission may work an injustice on the representor by requir- ing the setting aside of a transaction for what may be a comparatively minor transgression. It can be a harsher remedy than damages, especially where the parties have performed, or started to perform, the contract between them.
It is because of the potentially severe effects of rescission that various bars exist upon its exercise. In particular, rescission is no longer available if the contract has been affirmed,1O8 if innocent third parties have acquired rights under the contract,108 if substantial restitution of benefits received is impossible10 and perhaps merely if undue time has elapsed.'" Moreover, it is often stated that an executed contract cannot be rescinded in the absence of fraud or of (^) error in substantialibus.112 Nobody is quite certain of the operation of this particular bar, which has been abolished in Eng- land.113 It has been avoided on occasions by a generous interpretation of what constitutes error in substantialibus114 and by restricting it to contracts
- See Taylor, supra n. 10 at 141-142.
- See generally: Furmston, Cheshire and Filaot's Law of Contract (10th ed. 1981) 237-266; Treitel, supra n. 12, at 243-291; Waddams, The Law of Contracts (1977) 248-257.
- For example, Whittington v. Seale-Hayne (1900). 82 L.T. 49 (Ch.D.). 107. Misrepresentation Act 1967, c. 7, s. 2(2) (U.K.).
- For example, (^) United Shoe Machinery Co. of Canada v. Brunet, [ 1909] A.C. 330 (P.C.).
- For example, (^) Lewis v. Averay, [ 1972) 1 Q.B. 198 (C.A.).
- For example, Thurston v. Strei/en, [1951] (^) 4 D.L.R. 724 (Man. K.B.).
- For example, (^) Leaf v. International Galleries, [1950] 2 K. B. 86 (C.A.).
- For example, Redican v. Nesbitt, [ 1924] S.C.R. 135. 113. Misrepresentation Act 1967,c. 7, s. 1(b) (U.K.).
- For example, Alessio v. Jovica (1973), 42 D.L.R. (3d) 242 (Alta. S.C., App. Div.).
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almost impossible for the other party to prove that such a forecast consti- tuted in some way a statement of fact made with fraudulent intent.12' Deceit, therefore, offers little protection to a party induced to enter into a disadvantageous contract through another's misrepresentations.
B. Negligent Misstatement'^22
1. Duty of Care — General Considerations
The recognition of a tort of negligent misstatement causing financial loss by the House of Lords in Hedley Byrne & Co. Ltd. v. Heller & Partners Ltd.123 has cleared the way for the extensive operation of tort principles in the area of pre-contractual misstatements. The Court agreed that liability for negligent words could not be placed on the same footing as liability for negligent acts. Lord Pearce, for example, said: The reason for some divergence between the law of negligence in word and that of negli- gence in act is clear. Negligence in word creates problems different from those of negligence in act. Words are more volatile than deeds. They travel fast and far afield. They are used without being expended and take effect in combination with innumerable facts and other words. Yet they arc dangerous and can cause vast financial damage.12'
Liability for negligent misstatements causing financial loss could not, therefore, depend upon broad notions of foreseeability. It had to be more circumscribed. To that end, the Court introduced the limiting principle that a "special relationship" had to exist between the maker and recipient of the statement for a duty of care to arise. Hedley Byrne itself concerned the liability of a bank for giving misleading credit references about one of its customers. These references were transmitted to the plaintiffs, through their own bankers, with the result that the plaintiffs incurred a substantial loss. Lords Reid, Devlin and Pearce would have imposed a duty of care on the defendant bank if it had not been for the fact that the references had been accompanied by express disclaimers of responsibility. Lords Hodson and Morris also accepted the possibility of a duty of care in making statements. They thought, however, that, even without the disclaimers, it was unrea- sonable to require the defendant bank to respond carefully in giving such informal references.125 Thus, Lord Morris said: There was in the present case no contemplation of receiving anything like a formal and detailed report such as might be given by some concern charged with the duty (probably for reward) of making all proper and relevant inquiries concerning the nature, scope and extent of a company's activities and of obtaining and marshalling all available evidence as to its credit, efficiency, standing and business reputation. There is much to be said, therefore, for the view that if a banker gives a reference in the form of a brief expression of opinion in regard to credit-worthiness he does not accept, and there is not expected from him, any higher duty than that of giving an honest answer.
- For example, the trial judgment in Ronald Elwyn Lister Ltd. v. Dunlop Canada Ltd., supra (^) n. 52.
- See generally: Schwartz, "Hedley Byrne and Pre-Contractual Misrepresentations: Tort Law to the Aid of Contract?" (1978), 10 Ott. L. Rev. 581. 123. Supra n. I. 124. /bid., (^) at 534. 125. Ibid.. at 503-504 (per Lord Morris) and at 512-514 (per Lord Hodson). 126. Ibid., at 504. Rather than talking of a duty of honesty, it is submitted that it is better to say that, in certain circumstances, the duty of care can be,discharged without the informant having, for example, to undertake extensive enquiries. The duty of care is merely a duty to take such care as the particular circumstances of the case require. This point is well made in Winfield and Jolowicz on Tort (I l th (^) ed. 1979) 265.
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It is not easy to extract from the decision the basis upon which a duty of care will be imposed in respect of negligent misstatements causing finan- cial loss.127 The House of Lords stressed the fact that, for a duty of care to arise, the informant must have assumed responsibility for the exercise of reasonable care in making his statements.^128 On this basis, therefore, the duty of care is not imposed but is undertaken voluntarily by the defendant. Lord Reid, for example said: So it seems to me that there is good sense behind our present law that in general an innocent but negligent misrepresentation gives no cause of action. There must be something more than the mere misstatement ... The most natural requirement would be that expressly or by implication from the circumstances the speaker or writer has undertaken some responsibility, ...1R The emphasis upon an assumption of responsibility by the representor means that, in some respects, liability in tort for negligent missatement is akin to a contractual liability. Lord Devlin made the connection between tort and contract in this context quite explicit: [T]here is ample authority to justify your Lordships in saying now that the categories of special relationships which may give rise to a duty to take care in word as well as in deed are not limited to contractual relationships or to relationships of fiduciary duty, but include also relationships which in the words of Lord Shaw in Nocton v. Lord Ashburton, 119141 A.C. 932 at 972, are 'equivalent to contract,' that is, where there is an assumption of responsibility in circumstances in which, but for the absence of consideration, there would be a contract. Of course, rarely will a defendant expressly assume responsibility for the accuracy of what he says. The major question to be resolved, therefore, is under what circumstances will it be inferred that a defendant has assumed such a responsibility. In determining this question, a court is in effect decid- ing whether or not a duty of care should be imposed upon the defendant. As a practical matter, therefore, it makes little difference whether the duty of care is regarded as assumed or imposed, except perhaps when the issue is raised as to the effect of an express disclaimer by the defendant. If the duty is assumed, then a disclaimer must operate to prevent such an assump- tion of responsibility. If, on the other hand, the duty is imposed, then arguably a disclaimer can operate only as a defence to a breach of duty. In the latter situation, a disclaimer would presumably be subjected to a much more rigorous scrutiny by the courts. Lord Reid gave the broadest view of when the defendant would be under a duty of care in respect of statements made by him. He could see:
[Nlo logical stopping place short of all those relationships where it is plain that the party seeking information or advice was trusting the other to excercise such a degree of care as the circumstances required, where it was reasonable for him to do that, and where the other gave the information or advice when he knew or ought to have known that the inquirer was relying on him.13' In general, therefore, a defendant will be taken to have assumed a duty of care where it is reasonable for a party to rely on the defendant's statements.
- For an excellent discussion of this question. sec Feldthusen, "Negligent Misrepresentation: A Closer Look at the Basis of the Defendant's Duty of Care" in Issues in Ton law (Steel and Rodgers-Magnet ed. 1983) 179-217. 128. /bid., at 192-194. 129. Supra n. I, at 483. 130. Ibid., at 528-529. 131. /bid.,^ at 486.
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