February 2021

Recent trends in misleading or deceptive conduct and contracts

In our practice, misleading or deceptive conduct claims founded in section 18 of the Australian Consumer Law (ACL) are commonly seen. Part of the reason for this is that parties are often looking for a way to get around terms of contracts that they have agreed to, or to hold someone accountable when there is no applicable contractual term available.

While the ACL is a consumer-focused piece of legislation, the scope of section 18 is broad and applies in both consumer and commercial contexts. In this article, we look at learnings from two areas where we are seeing misleading or deceptive conduct allegations in commercial cases, being:

  1. The role of silence as relevant conduct.

  2. Pre and post contract issues.

Misleading or deceptive conduct: a refresher

For conduct to be misleading or deceptive, there is usually (although not always) a representation being made.  That representation (or more specifically, the conduct) must be made in trade or commerce and must be likely to mislead or deceive. When a person relies upon conduct that is found to be misleading or deceptive, and they suffer loss or damage as a result of that reliance, they are entitled to be compensated to place them in the position they would have been had the conduct not occurred.

Below are just some examples of circumstances in which misleading or deceptive conduct can arise in commercial contexts:

  • Negotiating a deal – for example, by representing the financial position of the company;

  • Changing a contract – for example, by representing the production capacity of a supplier;

  • Marketing – for example, by advertising certain attributes of a product;

  • Regulators – for example, by disclosing, or failing to disclose, material facts to the regulator as required;

  • Commercial discussions – for example by stating or implying a state of play is true, such as that a party will be its service provider, when in reality a number of potential providers are being considered.

Further, a representation can take many forms and does not need to be in writing. A representation can be express or implied, written or oral, or partly written and partly oral. In short, the ‘conduct’ will be assessed based on all the relevant facts and circumstances. Hence, and as a further complication, silence can also constitute misleading or deceptive conduct.

Silence

It is settled law that silence can be misleading or deceptive. Recently, the NSW Court of Appeal summarised the current status of the case law as to how silence can be misleading or deceptive as follows[1]:

the High Court made clear the circumstances in which non-disclosure or silence can be misleading or deceptive – in essence, where, in the whole of the circumstances in which the parties are situated, a “reasonable expectation” exists that disclosure should be made or silence broken.

For silence to constitute misleading or deceptive conduct, the silence will need to arise in a context in which there is a reasonable expectation that a disclosure should be made. This principle is complicated by the approach of the courts in dealing with commercial parties.

A commercial party is not required to volunteer information to a counterparty, even if that information may assist in the decision-making process. A practical example of the importance of commercial context to a claim of misleading or deceptive conduct was illustrated in the recent NSW Court of Appeal case of Wormald v Maradaca Pty Ltd [2020] NSWCA 289. In that case, it was found that a failure of the shareholders of a seller company to disclose certain facts about the business did not constitute misleading or deceptive conduct in circumstances where:

  • The purchaser knew, or ought to have known, of salient facts including the precarious financial position of the company;

  • The purchaser was sophisticated, well-resourced and at arms-length from the sellers; and

  • The purchaser elected not to undertake updated due diligence on the company due to time constraints.

In the circumstances, the Court of Appeal found that any loss incurred was caused by a calculated risk taken by the purchaser to acquire the company, rather than any misleading or deceptive conduct.

Commercial parties should be aware that silence can be used to their advantage in transacting with an arms-length party, provided there is no reasonable expectation that they should disclose information. This obligation can arise in a number of different circumstances, for instance if there is a fiduciary relationship intertwined within the relationship between a number of parties and entities. If certain information may be detrimental upon disclosure, careful consideration should be given to whether to remain silent or volunteer the information. It will be key to think about who you are dealing with in these circumstances, as a sophisticated and well-resourced commercial party will be considered in a different light by a court than your average ‘mum and dad’ party.

Contracts: the before and after

Recently, we have been seeing a lot of misleading or deceptive conduct cases in the contractual space. These cases are predominantly falling into two categories:

  1. Where the parties have already entered into a written contract.

  2. Where parties were negotiating towards a contract, but have ended their relationship before a contract was executed.

Post contract

We are seeing parties attempting to sidestep the contractual terms by claiming that conduct prior to contracting was misleading or deceptive. Most contracts will contain an ‘entire agreement’ clause, by which it is usually said that pre-contract representations do not form part of the agreement. However, there is clear caselaw to say that these clauses do not necessarily preclude a claim being brought on the basis that a party to the contract was misled or deceived prior to execution. A common argument here is that the contract was only entered into because of the pre-contractual representation, and hence the terms of the contract itself are not properly relevant to the misleading or deceptive conduct claim itself.

Given this, what we have been seeing instead is lawyers getting creative with these clauses in an attempt to exclude the ability to rely upon pre-contractual representations, so that the misleading or deceptive conduct claim can be brought but the essential element of the relevant ‘conduct’ cannot be proved due to the contractual term. The success of this approach is mixed.

Pre contract

We are also seeing a lot of activity around the second category in the tender space. More and more it appears tendering parties are becoming frustrated when they are not awarded a contract. This may have something to do with the time and expense that tender processes now take up, and tendering parties taking on liabilities to ensure they can meet tender criteria without any certainty they will be successful. At times, this is arising in circumstances where representations have been made that their tender was successful. It appears it is becoming more common for parties to advance to the contract negotiation stage of a tender, only for the wheels to fall off and the parties to go their separate ways.

While experienced commercial parties will know it is not uncommon for negotiations to break down at the contract stage, it is becoming a fertile area of dispute in the misleading or deceptive conduct space. Given the likely terms of any tender process, there are generally protections built in to prevent liability arising until a contract has been agreed in accordance with the relevant process. However, tender processes are subject to different legislative regimes and process documents, and each will very much turn on their own facts.

When running a tender, you should be careful as to what is said, or otherwise represented, to a tendering party prior to the execution of a contract to ensure no claim can be made. Conversely, tendering parties should be careful not to hedge their bets and incur liabilities until they are sure the contract will be executed, and knowing anything taken on can be otherwise utilised in their business.

Takeaways

Misleading or deceptive conduct is a complex area of law with far-reaching implications. However, there are some key takeaways that should be considered when transacting in the commercial space:

  • Context is key – where well-resourced, arms-length commercial parties of equal bargaining power are in dispute, a court will be hesitant to intervene to assist a party that has disregarded its own interests, whether carelessly or on a more informed basis.

  • Investigate risk – when negotiating a commercial contract, parties ought to be aware of the potential risks and should, where available, undertake appropriate due diligence to satisfy themselves of that risk.

  • Reliance without due diligence is dangerous – a commercial party cannot solely rely on the other to inform them of any adverse risk that may be present, particularly when the party is aware of the circumstances giving rise to that risk.

  • Positive conduct versus silence – where an allegation of misleading or deceptive conduct arises from a positive misrepresentation or active conduct, rather than silence, the considerations will be different and may be less difficult to overcome.

  • Think twice on contractual protection – just because you sealed the deal and executed the contract doesn’t mean you are safe from a claim for misleading or deceptive conduct. Your pre-contractual representations can still come back to haunt you.

  • Pitfalls in tendering – keep your powder dry until the contract is signed. If you are the party running the tender, watch your words to ensure you are not making representations that could come back to bite you, while tendering parties should try to avoid expending funds on liabilities until the contract is executed or they know what is taken on can be otherwise utilised in their business.

Authors: Gavin Stuart & Scott Homan

 

[1] Nadinic v Cheryl Drinkwater as trustee for the Cheryl Drinkwater Trust [2020] NSWCA 2, [40].