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All businesses, regardless of size, will enter into hundreds, possibly even thousands of contracts throughout their course. Business contracts serve many purposes, like helping businesses acquire and dispose of assets, receive goods and services and even establish partnerships with other businesses. As such, contracting parties often have less regard for pre-contractual negotiations. These discussions may alter the contracting parties’ liability. They may expose a company to action by the Australian Competition and Consumer Commission (ACCC), primarily if they do not correspond to the contract’s written terms or breach the Australian Consumer Law. This article will discuss when pre-contractual negotiations and statements can be misleading or deceptive.
Before buying a business, it is important to undertake due diligence, to verify the information supplied by the seller. This guide will walk you through the due diligence process.
What is Misleading or Deceptive Conduct?
Consumer law prohibits misleading or deceptive conduct in trade or commerce. A company or person breaches this law where:
- a person;
- engages in conduct;
- in trade or commerce; and
- the conduct is misleading or deceptive or is likely to mislead or deceive.
Conduct includes doing or refusing to do any act and a business. Conduct may also breach the if they mislead or deceive through either:
- oral;
- written; or
- silent representations.
Moreover, a party’s intention is irrelevant. This means a business can engage in misleading and deceptive conduct, even where they believe they were acting reasonably and honestly.
Typically, a representation will be regarded as misleading or deceptive, where it is likely to lead a reasonable person into error. Although, in the case of pre-contractual negotiations, a party’s conduct will be misleading or deceptive if you can show that a hypothetical person would enter into the contract based on particular statements made by a party before they entered it. Entering a contract due to a party’s misrepresentations would be the ‘error’ a reasonable person was led into. Pre-contractual statements that are misleading or deceptive may include:
- false statements about the amount of money you will make under a contract;
- incorrect information on the price you will pay for any goods or services received under the contract;
- fake testimony about the success of a product;
- making wild or extravagant claims about a good or service that cannot be fulfilled in fact; or
- making false representation or warranties about the types of support or services you will receive.
What Representations Can Lead Someone to Error?
For a representation to lead a person into error, it must at least be a factor that prompts a party to enter into the contract.
This differs from representations which confuse and cannot be categorised as misleading or deceptive. Suppose a party to a contract takes reasonable care of their own interests, such as inquiring into the misleading information provided by the other party. In that case, the courts have determined that such a party has not been led into error.
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How Reliable Are Pre-Contractual Representations?
Pre-contractual representations can be verbal or written, like statements on a website or marketing materials.
Whether a statement breaches consumer law in the context of a specific contract or dealing will depend on several relevant factors, including:
- the amount of time passed between communications;
- whether either or both parties precisely recall what was said;
- the probability of the statements being made;
- any inconsistencies between the pre-contractual oral communications and the documents forming part of the transaction; and
- the general reliability of the evidence under cross-examination, if relevant.
What is the Effect of Contractual Disclaimers?
Given that parties cannot contract out of consumer law, it is essential to understand that any clause in a contract that attempts to limit or exclude liability for misleading or deceptive conduct is void. However, a clause to this effect may be relevant in determining a party’s state of mind when entering into a contract. For example, suppose you sign an agreement which excludes all external warranties. In that case, this may be used as evidence against you if you are alleging that another party made an external warranty, relying on you.
Key Takeaways
If you are looking at entering into a contract, you should always ensure that the terms you are signing align with the representations made by the other party before signing. Seek legal advice first and think carefully about whether the other party has made any statements that have led you to the execution of the contract.
If you are worried that you have made a misleading or deceptive representation prior to entering a contract, our experienced dispute resolution lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
Frequently Asked Questions
Conduct is misleading or deceptive where it is likely to mislead or deceive. Further, conduct may include doing or refusing to do any act and a business. You may also breach consumer law if you mislead or deceive through oral, written or silent representations.
Pre-contractual representations can be verbal or written, like statements on a website or marketing materials. For verbal negotiations before a contract, parties rarely write down every offer and counter-offer during the bargaining process.
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