Misleading or Deceptive Conduct During Pre-Contractual Negotiations

All businesses, regardless of size, will enter into hundreds, possibly even thousands of contracts. Businesses contract to acquire and dispose of assets, leverage resource capabilities and establish partnerships with other corporate entities, to name a few. In doing so, contracting parties tend to focus on the form of the written agreement without having much regard to the surrounding circumstances.

Pre-contractual negotiations and promises made as part of the sales pitch may alter the contracting parties’ liability, especially if they don’t correspond to the contract’s written terms. Below, we look at when pre-contractual negotiations and statements made during a sales pitch will be considered misleading or deceptive.

What Is Misleading or Deceptive Conduct?

Australian Consumer Law (ACL) under section 18 prohibits misleading or deceptive conduct in trade or commerce. Parties contravene the section where:

1. A person;

2. Engages in conduct;

3. In trade or commerce; and

4. The conduct is misleading or deceptive or is likely to mislead or deceive.

Section 2C of the Acts Interpretation Act 1901 (Cth) defines a person to include a body corporate and so a company can offend section 18.

Conduct includes doing or refusing to do any act. Consequently, a person contravenes the provision if they mislead or deceive through either oral or written representations.

‘In trade or commerce’ is also construed broadly and encompasses pre-contractual negotiations between contracting parties (Bevanere Pty Ltd v Lubidineus (1985) 7 FCR 325).

Determining whether conduct is misleading or deceptive requires an objective assessment of the conduct as a whole. The party’s subjective intention is irrelevant, and a person can contravene section 18 where they acted reasonably and honestly (Yorke v Lucas (1985) 158 CLR 661). Typically, a representation will be regarded as misleading or deceptive where it is capable of leading a person into error (Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd [1982] HCA 44).

What Representations Can Lead Someone Into Error? 

In the context of pre-contractual negotiations, for a representation to lead a person into error it must act as an inducement.That is, it must be the thing that prompts the parties to enter into contractual relations. Representations which merely cause confusion cannot be categorised as misleading or deceptive. The Courts have held that a person will not be lead into error where they fail to take reasonable care of their own interest (Neilsen v Hempston Holdings Pty Ltd (1986) 65 ALR 302).

How Reliable Are Pre-Contractual Representations?

Pre-contractual representations are usually verbal. Unsurprisingly, parties rarely write down every offer and counter-offer during the bargaining process. So what weight, if any, can be assigned to these verbal pre-contractual negotiations? Vision Eye Institute Ltd & Anor v Kitchen & Anor [2014] QSC 260 states that in determining whether oral communications are reliable, the following are relevant factors:

• 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’s the Effect of Contractual Disclaimers?

Parties cannot contract out of the ACL. Any clause in a contract purporting to limit or exclude liability for misleading or deceptive conduct is void.

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Questions? Let our Consumer Lawyers know on 1300 544 755.