The New Zealand Reform

As discussed above, it was well established by around the mid-1970s that negligent misrepresentation provided a possible alternative cause of action in respect of mis­statements inducing a contract between the representor and representee.

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 mis­representation made negligently, be entitled to damages from that other party for deceit or negligence in respect of that misrepresentation.

Thus, a contracting party who seeks to recover damages from the other party in respect of a misrepresentation made ‘ by or on behalf' of the other party that induced entry into the contract is no longer required to establish fraud, negligence, breach of warranty or breach of a collateral contract. Damages can now be claimed for a purely ‘innocent misrepresentation' and these damages are to be assessed as if the representation were a broken term of the contract. In addition, the common law actions for damages in respect of both pre-contract fraudulent and negligent misrepresentation are abolished.^[1515] It is important to note, however, that it is only the contracting party responsible for the misrepresentation who is liable under the section and who cannot be sued in tort.

The above measures were seen as essential if the objective of simplifying the law by providing a common set of remedies for misrepresentation and breach of contract was to be fully implemented. Nevertheless, as I unsuccessfully argued in my submissions to the parliamentary select committee, the enactment of section 6, although well intentioned, was misguided. I say this for two main reasons, both related to the decision to provide that damages are to be assessed on the assumption that the misrepresentation was a broken term of the contract, whether that misrepresentation be purely innocent, negligent or fraudulent.

A. The First Objection

The section fails to pay due regard to the fact that the essential complaint of victims of misrepresentation is that they have been wrongfully induced to enter into contracts that they would not have entered into if the truth had been told. An award of damages should therefore aim to provide reparation for the result­ing harm. Assuming that the representation was not made a term of the resulting contract, the complaint is not ‘you broke your promise and you must put it right' but ‘your misrepresentation induced me to take action that I would not otherwise have taken, and that action has cost me—you must pay for the loss resulting from my reliance on your representation'. Measuring damages on the former basis nec­essarily requires the court to ask ‘what loss flows from the lack of truth of the rep­resentation treated as a term of the concluded contract?', whereas doing so on the latter basis requires it to ask ‘what loss flows from entry into the contract induced by the misrepresentation?'.

Since section 6 provides that damages are to be awarded ‘in the same manner and to the same extent as if the representation were a term of the contract that has been broken', it follows that they are to be measured on the former basis. And, while this will often lead to greater recovery (sometimes unfairly, as we shall see below), on some occasions it will, in theory at least, result in the denial of any com­pensation. For example, the award of damages in Capital Motors Ltd v Beecham that was discussed earlier^[1516] could no longer be made: it was the fact that the first owner was a rental-car company, not that it had had more than two owners, that was the reason for its diminution in value. There may also be situations where the representation operates as an important inducement but concerns a ‘collateral' matter—ie, a matter that does not relate to the condition or value of the subject matter of the contract or the benefit/burden of the contract. For example:

P is induced to buy shares in a mining company by D’s negligent (or fraudulent) mis­representation that X, a wealthy entrepreneur known to P, has invested in the company. P loses all her money when the company collapses. It would still have collapsed even if X had invested.

P buys D’s house for $500,000 relying on D’s misrepresentation that the house is situated within the zone of a school that P is particularly anxious to send her children to. The actual value of the house is $450,000 and the reputation of the school is not such that the house would have been worth more if D’s representation had been true.

In both of these examples no damages are recoverable under section 6 for the loss suffered by P even though that loss would have been avoided if the truth had been told.

Consider also the following situation where some damages will be recoverable but much less than the amount recoverable in tort if breach of a duty of care or deceit were established:

P is induced to buy a block of land from D by D’s misrepresentation that half of the land is covered with millable timber.

Further, a variation to these facts would result in an even greater discrepancy between the two measures. Suppose that P can establish that, but for D’s misrep­resentation, she would have offered and D would have accepted a price of $50,000. Here the damages recoverable in tort prior to the Act would be the difference between the price paid and the price she would have paid if the true position had been disclosed ($100,000-$50,000).^[1518]

Finally, the ‘benefit of the bargain’ approach embodied in section 6 may also be completely unworkable or lead to unacceptable results even in situations where the representation does relate to the condition or value of the subject matter of the contract. The following example, modelled on an illustration given in the Restatement (Second) of Torts,^[1519] highlights the difficulties:^[1520]

The owner of a valuable piece of china is induced to sell it for $100 by a representation that it has certain defects that make it practically worthless. If the damages are assessed by comparing the representee’s actual position with the position he would have been in if the representation had been t rue, the result is that she has suffered no loss. She would have sold worthless property for a very good price.

It is inconceivable that a court would refuse to grant damages under section 6 of the difference between the actual value of the china and the price received, but precisely how it could justify this award in view of the words of the section is a matter of some difficulty.

B. The Second Objection

The second objection to section 6 is that, in the more usual situation where the availability of the equivalent of loss of bargain damages will result in recovery of a larger sum than that recoverable under the tort measure, such damages will some­times result in the imposition of an unfair burden on the defendant. Consider the following variation on the example given above:

P is induced to buy a block of land from D by the negligent misrepresentation of D’s (now insolvent) real estate agent that half of the land is covered with millable timber. P buys the land for $100,000. It transpires that there is only a one-quarter coverage of millable timber. The land is still worth $100,000, but, if the representation had been true, it would have been worth $200,000. In the absence of a proven lost opportunity to pay less for the land, P would previously have recovered no damages under the tort measure, but she now recovers the substantial sum of $100,000 under the contract measure embodied in section 6.

It might be objected that this is not an unfair burden to impose on D because P could possibly recover the same amount at common law by establishing that the representation gave rise to a collateral contract. However, it needs to be borne in mind that it was D’s real estate agent who made the representation and that, while such agents normally have apparent authority to make representations about the subject matter, they do not have apparent authority to bind their principals contractually.

The point can be further illustrated by the decision of the New Zealand Supreme Court, now the country’s highest court, in Marlborough District Council v Altima- rloch Joint Venture Ltd,^[1521] a case where the relevant representation was also made by agents who had no authority to bind their principals contractually. The case was difficult, with multiple parties involved, but the relevant facts can be simplified for present purposes without losing their essential flavour.

This award was probably correct in view of the fact that section 6 deems a mis­representation to be a broken term of the contract for the purposes of damages assessment. This was not a Ruxley^s2 case where the cost of cure was so out of proportion to the benefit to be gained as to be unreasonable. However, the cor­rectness of the decision is not our present concern, which is to point to a flaw in section 6 because it can lead to exorbitant awards and unfair burdens being placed on defendants. Three points are perhaps worth making. First, the negligent agents, who were joined as third parties by the vendors, were ordered to indemnify the vendors so, in effect, they ended up paying loss of bargain damages for a negligent misrepresentation. If they alone had been sued by the purchasers, perhaps because the vendors were insolvent or had left the country, their liability would prima facie have been the comparatively modest sum of $125,000, the difference between price paid and value. Secondly, let us suppose that the agents had been insolvent or oth­erwise not worth suing. The vendors, who were completely innocent and made no promise as to the extent of the available water rights, would have had to pay more than $1m from their own pocket, thus depriving them of 40 per cent of the value of the no doubt hard-earned asset they had sold. Thirdly, it can be surmised that the instinct of the dissenting judge, Elias CJ (with whom Anderson J agreed), was that an award of over $1m would be entirely unjust in the circumstances. Her Honour referred at different stages of her reasoning to the disparity between that sum and both the price paid/actual value differential ($125,000) and the difference between the value of the land with and without the represented values ($400,000).^s3 While neither factor provided a convincing basis for her eventual conclusion that, as in

⁸² Ruxley Electronics and Construction Ltd v Forsyth [1996] 1 AC 344.

⁸³ Marlborough District Council (n 81) [32] and [41].

Ruxley, an award of the full cost of cure would be unreasonable, there can be no doubt where the judge's sympathies lay. Perhaps some of her reasoning might have been better directed to a call for a reconsideration by Parliament of the provision for loss of bargain damages in section 6.

VI.