Commercial Law Update - 'Misleading and deceptive conduct claims in a contractual context'

Commercial Law
Ms Qc 0023
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[1]  Any commercial dispute practitioner active in recent decades will be well familiar with the pleading phenomenon of matching statutory misleading and deceptive conduct claims to fortify a common law claim for breach of contract.

Personal observation is that this has historically been done reflexively with little or insufficient thought to the form, content or merits of the statutory claim or the relationship between these two quite distinct forms of action. Often a negligence claim will be thrown in for good measure.

Equally, most practitioners have pleaded the statutory claim for a rational reason.  Perhaps the broader facts allow it and that is thought to be sufficient justification.  Perhaps there is a constraint on the contractual warranty which it is thought can be avoided by resort to the statutory remedy.  Perhaps the measure of damages is more generous.  Or perhaps doing so broadens the evidence in a way which is perceived to confer a forensic advantage.

Nevertheless, commercial dispute practice is not what it was.  Practitioners are now subject to statutory obligations and liabilities which their conscience and professional self-respect ought to have imposed on them regardless.  It follows it is simply not proper to plead reflexively.

Claims connected with construction and infrastructure projects seem particularly prone to the reflex.  Frankly, they are almost invariably an attempt at an end-run around the contractual risk-allocation.  Where that is so judges just as invariably see through it and rightly protest at the wasted resources which results.[2]

However, there are circumstances where such claims are legitimately part of a broader enquiry about how the contractual risk allocation came into being.

Actionable representations based on contractual promises

Perhaps surprisingly quite recent cases have still had to grapple with in limine issues such as:

(a)           Whether terms of a contract can constitute representations amounting to actionable conduct;

(b)          Whether statutory compensation can be constrained by a contract; and

(c)           Whether non-parties to a contract can obtain relief in respect of representations made in a contract.

In truth the first issue stated is easily answered at the general level.  It gets more difficult where it counts at the level of detail of a particular case as a recent example shows.  As French CJ said in Campbell v Backoffice Investments Pty Ltd [3]:

35.     The term "conduct which is misleading or deceptive or likely to mislead or deceive" is apt to cover a large variety of possible circumstances in which the conduct of one has a tendency to lead another into error.  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 in the document out of the scope of "misleading or deceptive conduct".  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 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 prohibition.  This is consistent with the observation by Lockhart and Gummow JJ in Accounting Systems 2000 (Developments) Pty Ltd v CCH Australia Ltd:[4]

"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."

36.     The question whether the giving of a warranty about the accuracy of a statement of present fact or a forecast of performance is misleading or deceptive raises slightly different considerations.  The giving of a warranty embodying a false statement of present fact may be characterised as misleading or deceptive conduct simply because it involves the making of that false statement.  A warranty as to a forecast of performance may fall within the category of, or involve the making of, a statement as to a future matter.  Such a statement can be characterised as misleading or deceptive or likely to mislead or deceive according to whether there were reasonable grounds for making it or whether any other implied representations which it conveyed were true.
42.     ... it is not an answer to a plea of misleading or deceptive conduct based on misrepresentation to assert that the misrepresentation is contained in a contractual document. "

The second issue stated is answered shortly by pointing to s.64 of the Australian Consumer Law which expressly prohibits contracting out of liability for misleading and deceptive conduct. [5]  In Clark Equipment Australia Limited v Covcat Pty Limited [6] Sheppard  J said of the equivalent Trade Practices Act provision “The terms of the contract are irrelevant.”

As to the third issue stated, in Accounting Systems 2000 (Developments) Pty Ltd v CCH Australia Limited[7] the majority (Lockhart and Gummow JJ) held that relief:

... is not limited to parties in contractual relations with the party which contravened s 52 ... It is no objection to relief under these provisions that the misleading conduct is found in the making of a contractual provision, and the complainant does not have contractual privity with the defendant.

Experienced practitioners will pass over the above without pause and recognise that context is everything.  RCR Energy Pty Ltd v WTE Co-Generation Pty Ltd [2017] VSCA 50is to some extent a useful illustration, subject to the caution at the outset that the procedural context was an application for summary judgment so that the survival of the contract-based ACL claim may turn out to be a short and temporary (and ultimately expensive) victory.

The first instance reasons WTE Co-Generation v RCR (No 3) [2016] VSC 674conveniently sets out the full facts.  The context was the design and construction of a cogeneration plant to combust non-recyclable waste materials from paper mills to produce both steam and electricity for use at the principal’s paper mills (and to significantly reduce landfill).  Contract price was approximately $24 million.

Typically for any significant infrastructure project the contractor RCR made a proposal and the contract parties then developed performance characteristics.  In this case those performance characteristics correlated to different fuel compositions.

Also typically for projects of this kind, there was a series of related party transactions concerning associated commercial aspects.  In June 2010 WTE Co-Generation entered into a Deed of Sub-sublease and a Chattel Lease for the plant and Visy Energy (the second plaintiff) entered into the Chattel Lease and a Take and Pay Agreement with Visy Industries Australia and Westpac (Visy Energy was not a party to the principal contract).  In September 2010 the principal Visy Paper novated to WTE Co-Generation by deed.

Commissioning was unsuccessful because the performance characteristics were not met.  WTE Co-Generation terminated.  The proceeding made claims for rectification, liquidated damages and misleading and deceptive conduct.  WTE Co-Generation’s statutory claim was the same as its contract claim for rectification.  Visy Energy’s claim was essentially derivative and for loss of income of approximately $24.7 million pursuant to the Take and Pay Agreement.

WTE Co-Generation’s statutory claim is the point of real interest.  It raised the plant’s future performance characteristics, RCR’s qualifications and experience and the suitability of its proposal for the works to achieve the performance guarantees.

The curiosity is that the representations relied on were confined to specific terms of the contract.

RCR in effect made 3 key points in its application or the summary dismissal of the misleading and deceptive conduct claim.

First, RCR made no relevant representations in addition to or different from the contractual promises it made.  There is no authority to contrary effect. [8]  This seems to me to be a difficult submission to maintain given the definition of “engaging in conduct”[9]  which in terms includes “the making of, or the giving effect to a provision of, a contract or arrangement”.

Secondly, contractual promises constitute assent to and an intention to be bound by the terms agreed, nothing more.  In my opinion, in a novation context that raises interesting questions and of course it assumes privity is all, a contestable proposition.

Thirdly, if a contractual promise is unfulfilled (or even false) then the remedy is contractual, as the parties have agreed.  As a corollary the statute is not attracted if the only conduct is the contractual promise.  In other words, a contractual warranty cannot amount to an actionable misrepresentation under the statute on principle.  Otherwise the contractual risk allocation is undone.  RCR pointed to Special Condition 21 (which limited damages).  This of course is in substance a policy based submission about the sanctity of contract (and is the one I find most compelling in context).

Apart from a predictable argument to the effect that nothing arguable should be decided, the response to RCR’s position was essentially twofold.  First, as a broadform proposition the authorities sufficiently permit the statutory claim to be brought based on contractual promises to allow the claim to go to trial and secondly evidence of surrounding circumstances on the contract per se will be admissible at trial i.e. the true construction of the contract will depend on broader evidence than just the contractual terms, with the result that summary dismissal was inappropriate because that evidence was for trial by definition.

The primary judge accepted the plaintiff’s position, with the added gloss that representations as to performance might need to be scrutinised at the trial level to determine their meaning and effect in the contractual context.  The primary judge elaborated that it may be, for example, the representations conveyed an intention to perform to the performance standards but qualified by the usual risks of non-performance for projects of this type undertaken in the context of the contract.

This seems to me to be an articulation of the theoretical possibility that a contractual promise might when viewed in a broader context be seen as a more limited acceptance of the contractual risk allocation than the face of the contract suggests.  As I see it the difficulty with this gloss in the context of WTE Co-Generation is simply that this was not (apparently) the pleaded case.  A related concern is the quite fundamental question about what evidence is admissible and probative if the plaintiff’s case remains narrowly pleaded i.e. confined to the terms of the contract and no more.  To the extent there are different approaches to extrinsic evidence supported at the intermediate appellate level that remains problematic.[10]

On appeal RCR made two principal contentions of error by the primary judge (although of course the grounds were nominally more numerous).

First, RCR contended that the primary judge had not identified content of the conduct said to be misleading and deceptive.  This was the primary task on the application because absent reference to any other conduct accurate scrutiny of the terms of the contract supplied the answer.  In other words, (my paraphrase) the proposition that there was work for the evidence at trial to do beyond the documented terms of the contract was misconceived. 

Secondly, there was a fundamental problem with the statutory claim when contract as a whole was considered.  Specifically, Special Condition 21 of the contract contemplated that the warranties said to constitute representations would not be performed.  In my view this submission should have been decisive on the pleaded case.

WTE Co-Generation may have recognised the force of the second submission because it contended that the plaintiffs’ case was not that the representations were falsified by non­fulfilment of contractual promises but that RCR did not have reasonable grounds for making the promises/representations as to future matters and indeed that the promises/representations with respect to existing facts were false when made.  This is of course in substance another way of saying that the risk allocation effected by Special Condition 21 would not have been agreed if the fuller facts at the time of contracting had been known.  I reiterate my observation about whether the pleading could sustain that argument.

I add, for all the justifiable complaints by trial judges about the burdens imposed by excessive and unnecessary evidence, the plain fact is that this burden will not be lifted while arguments of this kind continue to be made and accepted.

The Court of Appeal (Weinberg, Whelan and Santamaria JJA) ultimately decided not to decide, but in doing so Santamaria JA made some clear and therefore helpful observations.

First, the fact that the conduct might also be analysed through the rubrics of contract or tort does not take it outside the statutory norm (at [60]).

Secondly, a contract may contain a representation (at [61]).  This could be a representation of a present state of fact or a representation as to the future which, on proper analysis is also a representation of a present state of facts (a present belief or intention based on presently existing reasonable grounds).  This could amount to misleading and deceptive conduct.

Thirdly, whether contractual promises can form representations for the purposes of the TPA or the ACL remains a matter of controversy (at [62]).

The delphic form of that proposition obscures the real issue.  My shortform answer is that (a) of course they can if there are extrinsic facts, but the facts relied on ought be clearly pleaded and (b) it is highly improbable in most cases that a contractual promise alone could constitute an actionable representation, to the extent that the issue ought be capable of determination in a summary way.

Fourthly, where a representation is said to appear in a contract, it will be necessary to examine all the terms of the contract to see if the allegation that there is a representation is made good (at [64]).

Fifthly, where, as is usually the case, a claim for loss and damages is made by reason of a breach of the statutory norm, the fact that the conduct forms part of a contract will raise particular issues when causation (reliance) is to be proved (at [64]).  This is particularly so when persons who are not parties to the contract claim to have relied upon some representation that arises from the contract.  Causation and loss and damage would be difficult issues which would depend on the facts of each case.

Again, that ought be pleaded out and in many instances capable of determination in a summary way

Sixthly, it may be that a provision of a contract is not a representation but nothing more than the undertaking of an obligation (at [64]).  If so there can be no misleading conduct.  This is because nothing is represented other than that an obligation has been undertaken, which is self­evidently true.

The Court of Appeal also observed that whether a contractual promise involves conduct that is capable of being misleading is something that will depend on all the circumstances of the case (at [67]).  Analysis of a contractual promise abstracted from all the circumstances that surrounded its making may involve an inappropriately narrow inquiry.  The determination of the content of any representation should be left to trial.  The presence of the special condition may affect a finding on that issue.  Further, the presence of such a provision may affect the contention of a third party that it relied upon the existence of the contractual promise and the assessment under the statute of any damages.

Seventhly, so far as contractual parties are concerned, there will be questions whether a claim for misleading conduct founded on a representation in a contract will give any additional remedy (at [69]).  So far as third parties are concerned there will be difficult questions of reliance and causation (at [70]).

Finally, if what is contained in a contract is a representation answering the description of conduct in the TPA or ACL then evidence of surrounding circumstances will be admissible on what the representations should be understood as conveying (at [72]).

Commentary

In his conclusion Michael Whitten QC made two observations directed to the distinction between contractual and derivative statutory claims.

The first was to recognise that relief for “breach of contract (and any limitations agreed between the parties on that liability) is concerned with conduct during the performance or operation of the contract, whereas the statutory imperative for relief arising from contraventions of the TPA/ACL is concerned mostly with conduct leading to and inducing entry into the contract.”

The second was that “breach of contract will be determined by assessing performance during the course of the contract against the requisite obligation [whereas] ….conduct in the form of representations made leading to or embodied in the contract will be misleading and deceptive where in the case of future matters, the maker had no reasonable grounds for making the representations, and where statements of existing facts are false at the time of making them.”

And of course under the statutory claim reliance is an additional factor and causation is more complex, as the Court of Appeal observed.  This must particularly be so where there has been a novation as here.  However, on the pleaded facts of WTE Co-Generation it is a little difficult to see how either of the above points of distinction could make a difference to the outcome.  The real point to me is whether there is really any scope for additional evidence at all.


Paper originally presented to Society of Construction Law Australia, May 2017.

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[1]           This paper is partly based on a paper presented by Michael Whitten QC at the SoCLA event in Melbourne in March 2017 and I acknowledge the significant contribution by that paper to my thinking.  However, the opinions expressed in this paper (and any errors) are mine and my responsibility alone.

[2]           See for example Aquatec-Maxcon Pty Ltd v Barwon Regional Water Authority (No 2) [2006] VSC 117 at [16] per Byrne J.

[3]           (2009) 238 CLR 304.

[4]           (1993) 42 FCR 470 at 505.

[5]           But see for exampleOwners SP 62930 v Kell and Rigby Pty Ltd [2009] NSWSC 1342 and Firstmac Fiduciary Services Pty Limited & Anor v HSBC Bank of Australia Limited [2012] NSWSC 1122 where a distinction was drawn between impermissibly contracting out of the statute and permissibility limiting liability or even the time for making a claim.  See also Lane Cove Council v Michael Davies & Associates and Others [2012] NSWSC 727.

[6]           (1987) 71 ALR 367 at 371.

[7]           (1993) 114 ALR 355; (1993) 42 FCR 470 at 506.

[8]           Cf Accounting Systems 2000 (Developments) Pty Ltd v CCH Australia Ltd, as recently endorsed by Edelman J in Australian Competition and Consumer Commission v Valve Corporation (No 3) [2016] FCA 196 [222].

[9]           Competition and Consumer Act 2010(Cth) Sch 2 s 2(2)(a).

[10]          See and compare for example Mainteck Services Pty Ltd v. Stein Huertey SA (2014) 89 NSWLR 633 at [66] to [85], rejection of Mainteck in Apple and Pear Australia Pty Ltd v. Pink Lady America LLC [2016] VSCA 280 at [91] to [141] and the rejection of Pink Lady in Zhang v. ROC Services (NSW) Pty Ltd [2016] NSWCA 370.

Ms Qc 0023
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Martin Scott QC principally appears in superior courts of record and large commercial arbitrations (including international and expedited arbitrations)

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