Impact of Parol Evidence Rule on Written Agreements and Tort Liability, Study Guides, Projects, Research of Law

Download Impact of Parol Evidence Rule on Written Agreements and Tort Liability and more Study Guides, Projects, Research Law in PDF only on Docsity! LIABILITY FOR PRE-CONTRACTUAL MISSTATEMENTS Nicholas Rafferty* I. Introduction Until the House of Lords decision in Hedley Byrne & Co. Ltd. v. Heller & Partners Ltd.' in 1963, the lack of any general remedy for negligent misstatements causing purely financial loss meant that a party, induced to enter into a contract by another's misrepresentations, was inadequately protected. A claim for damages suffered was liable to be met by those twin pillars of classical law, namely Derry v. Peek2 and Heilbut, Symons & Co. v. Buckleton.3 The first case decided expressly that simple negligence was insufficient to constitute the tort of deceit as there had to be actual dishon- esty on the part of the defendant4 and impliedly that there was no liability at all for merely negligent misstatements.5 Thus, Lord Bramwell said that: "To found an action for damages there must be a contract and breach, or fraud."6 The second case limited relief in contract by demanding that an intention, on the part of the representor, that a statement should constitute a contractual term be proved strictly, especially where there was a written contract between the parties.' Lord Moulton said that it was of the utmost importance for the House of Lords to "maintain in its full integrity the principle that a person is not liable in damages for an innocent misrepre- sentation, no matter in what way or under what form the attack is made."8 Whilst equity alleviated the representee's position through the remedy of rescission, no damages could be claimed in equity and rescission itself could be barred for a number of different reasons.9 This paper examines the remedies available to a party who has been induced to enter into a disadvantageous contract through another's misre- presentations. It deals first with contractual remedies and shows that contractual liability is so hidebound by restrictions that it fails to meet the needs of the representee in these circumstances. Moreover, it demonstrates that a contractual remedy may often be an inappropriate way of resolving the problem. Contractual damages may sit uneasily where the basis of the plaintiffs claim is that he, by entering into the contract, has relied upon the defendant's misrepresentations to his detriment rather than that the • Professor of Law, University of Calgary. I. [1964] A.C. 465 (H.L.). 2. (1889), 14 App. Cas. 337 (H.L.). 3. [1913] A.C. 30 (H.L.). 4. Supra n. 2, at 374 (per Lord Herschell). 5. This was certainly the interpretation favoured by the Court of Appeal just four years later in Le Lievre v. Gould, [ 18931 I Q.B. 491 where Lord Esher M.R. said at page 498: But negligence, however great, does not of itself constitute fraud. The official referee ... came to the conclu- sion that the defendant, though he had acted negligently, had not wilfully made any false statement, or been guilty of any fraud. All that he had done was to give untrue certificates negligently. Such negligence, in the absence of contract with the plaintiffs, can give no right of action at law or in equity. 6. Supra n. 2, at 347. 7. See generally: Greig, "Misrepresentations and Sales of Goods" (1971), 87 L.Q. Rev. 179. 8. Supra n. 3, at 51. 9. The remedy of rescission is discussed briefly in section I1.B. of this paper, infra. 19 84 C an LI ID oc s 14 1 64 MANITOBA LAW JOURNAL VOL. 14 defendant has guaranteed the truth of his representations.10 Rescission, on the other hand, even where available, may often be seen as too draconian in that it requires the whole transaction to be upset." This paper then proceeds to examine tortious liability for precontractual misstatements. It concentrates on the tort of negligent misstatement, trac- ing its development as a remedy for pre-contractual misrepresentations. It discusses the obstacles which still remain to the employment of this cause of action. Taking the view that in many cases this new tort provides the most satisfactory way of protecting the representee, it raises the hope that such obstacles can be overcome. H. Contractual Liability In contract, a representee may claim that a certain statement consti- tutes a contractual term for breach of which damages can be recovered, or may seek to rescind the contract in equity on the ground of misrepresen- tation. Each of these courses of action is discussed in turn. A. Damages for Breach of Contract 1. Parol Evidence Rule Where a contract has been recorded in writing, a plaintiff, in order to recover damages for breach of contract, will be forced to contend with the parol evidence rule.12 The classic formulation of that rule was given by Lord Denman C.J. in Goss v. Lord Nugent: By the general rules of the common law, if there be a contract which has been reduced into writing, verbal evidence is not allowed to be given of what passed between the parties, either before the instrument was made, or during the time that it was in a state of prepara- tion, so as to add to or subtract from, or in any manner to vary or qualify the written contract;" Where the rule is applied, a plaintiff will be unable to argue successfully that the defendant's pre-contractual representations constituted terms of the contract between the parties. He will be denied a contractual claim for damages. A plaintiff's position, therefore, may depend upon how strictly a particular court applies the rule. The English courts have been prepared to treat the rule as more in the nature of a common sense presumpution that a document which looks like a contract is to be regarded as embodying the entire contract between the parties." A plaintiff, however, has two avenues open to him to rebut such a presumption. First, he may be able to convince a court that certain oral representations constitute a contract collateral to the written contract. Sec- ondly, he may be able to establish that there is a single contract between the parties which is partly written and partly oral. The fact that there is 10. See generally: Taylor, "Expectation, Reliance and Misrepresentation" (1982), 45 Mod. L. Rev. 139; Reiter, "Contracts, Torts, Relations and Reliance" in Studies in Contract Law (Reiter and Swan ed. 1980) 253-255. 11. Reiter, ibid. 12. See generally: Treitel, The Law of Contract (5th ed. 1979) 135-143; McLauchlan, The Paroi Evidence Rule ( 1976). 13. (1833), 5 B. & Ad. 58 at 64-65, 110 E.R. 713 at 716 (K.B.). 14. Wedderburn, "Collateral Contracts", 119591 Camb. L.J. 58 at 61-64; McLauchlan, supra n. 12 at 50-52. 19 84 C an LI ID oc s 14 1 NO. 1, 1984 PRE-CONTRACTUAL MISSTATEMENTS 67 ties (1934) Ltd. v. Mudd,34 for example, a tenant was induced to sign a lease, containing a covenant that the premises would be used for business purposes only, by the landlord's oral assurance that it would not object to the tenant sleeping on the premises as he had done in the past. Harman J. held that "there was a clear contract acted upon by the [tenant] to his detriment and from which the [landlord] cannot be allowed to resile."35 Unfortunately, there was no consideration in this case of the leading author- ities on collateral contracts and so its stature is in some doubt. Ideally, the fact of contradiction should just be another factor in the determination of whether an alleged collateral agreement was in fact made. Clearly it will be easier for a party to establish the existence of a collateral contract which merely adds terms to the written contract. In the case of a direct contra- diction with a later written contract, a defendant always has the strong argument that the parties had agreed to set aside any prior oral assurances as exemplified by their execution of a written contract inconsistent with such assurances. Professor McLauchlan has convincingly shown that there is no need to rely upon what may often be the fiction of a collateral contract in order to obviate the parol evidence rule.3fi He points out that "there is a written contract for the purpose of the application of the rule only when the writing is intended by the parties as a contractual document which is to contain all the terms of their agreement."37 The parol evidence rule creates a pre- sumption that a document containing contractual terms embodies the complete contract between the parties. As has been pointed out earlier, the fact that the alleged oral representations were omitted from the writing is directly relevant to the issues of whether the oral statements were in fact made and, if so, of whether they were intended to have contractual effect. A court, however, should always listen to the argument of one party that the document in question was not intended to contain the whole contract and that the contractual terms are partly written and partly oral. Professor McLauchlan has isolated the factors which will assist a court in its determination of whether the writing should be regarded as the entire contract.38 Such factors include, (1) the nature of the writing38 — the more formal and detailed the writing, the less likely the courts will be to allow it to be amended by oral evidence; (2) whether the document has been signed" — where a document has been signed by both parties, it is more likely to be regarded as the complete contract between the parties; (3) the status of the parties41 — businessmen, for example, are much more likely than others to want to record their contracts entirely in writing; (4) the preparation of the document42 — where both parties have participated in drafting the 34. [1959] Ch. 129. 35. /bid., at 145-146. 36. McLauchlan, supra n. 12. 37. /bid., at 143. 38. /bid., at 58-79. 39. /bid., at 59-63. 40. /bid., at 63-64. 41. /bid., at 64-65. 42. Ibid., at 65. 19 84 C an LI ID oc s 14 1 68 MANITOBA LAW JOURNAL VOL. 14 document, the presumption of completeness will be more likely to operate; (5) whether the writing is in a standard form43 — by its very nature a standard form contract has not been drawn up to record the specific trans- action in question and hence there is more scope for an oral variation of the standard terms in a particular case; and (6) whether the writing spe- cifically provides that it is to constitute the entire contract between the parties.44 Recently, the English courts have shown a willingness to view the parol evidence rule in the light suggested by Professor McLauchlan and to deter- mine that a contract is partly written and partly oral. One such case is the Court of Appeal decision in Mendelssohn v. Normand Ltd..48 In that case, the plaintiff drove his car into the defendant's garage. There was a suitcase on the back seat containing jewellery. The plaintiff placed the bag under a rug and was about to lock up the car when he was told by an attendant that he was not allowed to do so. The plaintiff explained to the attendant that the suitcase was rather valuable but he gave him the keys to the car and told him to lock it up as soon as he had moved it. The attendant agreed to do so and gave the plaintiff a ticket. On his return, the plaintiff found the car unlocked and the keys in the ignition. The rug appeared to be in the same position on the back seat. He drove off. Later that evening he discovered that the suitcase was missing. The plaintiff sued the defendant garage company for the loss of the suitcase. The trial judge found that the suitcase had been stolen from the car, whilst unlocked, by one of the attend- ants. The question in the Court of Appeal was whether the defendant could rely upon the printed terms contained on the back of the ticket and, in particular, upon a clause which purported to protect the defendant from liability "for any loss or damage sustained by the vehicle its accessories or contents however caused". The Court held that the defendant, through the attendant, had expressly promised to lock up the car, which was translated into a promise to ensure that the contents were safe. Such an oral assurance took priority over the printed terms for the following reason: [Tlhc oral promise or representation has a decisive influence on the transaction — it is the very thing which induces the other to contract — and it would be most unjust to allow the maker to go back on it. The printed condition is rejected because it is repugnant to the express oral promise or representation." The Court, therefore, had no difficulty in concluding that the whole contract was not to be found in the small print on the back of the ticket. There was room for effect to be given to oral assurances made at the time of contracting. All of the factors identified by Professor McLauchlan above favoured denying giving conclusive effect to the writing in this case. There was no formal and detailed contract which had been prepared and signed by both parties. Rather, there was a standard form set of conditions which had been drafted by the defendant purely for its own benefit. 43. /bid., at 66-67. 44. /bid., at 73-79. 45. [1970] 1 Q.B. 177. 46. /bid., at 184 (per Lord Denning NCR.). 19 84 C an LI ID oc s 14 1 NO. 1, 1984 PRE-CONTRACTUAL MISSTATEMENTS 69 The other interesting aspect of Mendelssohn is that the oral assurance was allowed to override one of the printed conditions. Obviously, it will be easier for a court to give effect to oral terms which are merely in addition to the written part of the contract, but there is no requirement that the oral and written portions must be consistent with each other. The fact of con- tradiction is just one of the factors in the determination of whether a particular assurance was given and, if so, whether it was intended to have contractual effect and to have survived the inconsistent writing. The par- ticular term contradicted will also be relevant. A court will be especially ready, for example, to hold that a widely-drawn exemption clause must be read subject to some oral undertaking given at the time of contracting. Mendelssohn helps to put into perspective some earlier decisions, such as Couchman v. Hill.47 In that case, the plaintiff purchased, at an auction sale, the defendant's heifer which had been described in the sale catalogue as "unserved". That document also stated that the sale would be subject to the auctioneer's usual conditions and that all lots had to be taken "subject to all faults or errors of description". The auctioneer's usual conditions provided that the lots were sold "with all faults, imperfections and errors of description". At the time of the sale, the plaintiff had asked both the auctioneer and the defendant whether they could confirm that the heifer was unserved and they had each assured him that it was. Later, the heifer was found to be in calf and died as a result of carrying a calf at too young an age. The plaintiff sued the defendant for breach of warranty. The Court of Appeal held that the oral assurances given at the time of the auction took precedence over the printed exclusion clauses. Scott L.J. said: [T]here was clearly an oral offer of a warranty which overrode the stultifying condition in the printed terms: that offer was accepted by the plaintiff when he bid, and the contract was made on that basis when the lot was knocked down to him" The clearest statement delimiting the application of the parol evidence rule, and one entirely in accordance with McLauchlan's analysis, is con- tained in J. Evans & Son (Portsmouth) Ltd. v. Andrea Merzario Ltd..49 The plaintiff was an importer of machines from Italy. Since 1959, it had con- tracted with the defendant, which was a forwarding agent, to arrange for the carriage of goods to England. The contract between the parties was on the basis of the printed standard conditions of the forwarding trade. Prior to 1967, the defendant had arranged for the goods to be carried in crates below deck because of the possibility of corrosion if carried on deck. In 1967, the defendant proposed to arrange for the carriage of goods in the future by containers. The plaintiff agreed to such a changeover after being assured by the defendant that its goods would continue to be shipped below deck. Nothing was put into writing concerning the assurance and the parties continued to operate on the basis of the standard conditions. About a year later, a container was carried on deck and a machine belonging to the plaintiff was lost overboard. The plaintiff claimed damages for breach of 47. [ 1947] K.B. 554 (C.A.). See also. Harling v. Eddy, 119511 2 K.B. 739 (C.A.). 48. Ibid., at 558. 49. [ 1976] 2 All E.R. 930 (CA.). 19 84 C an LI ID oc s 14 1 72 MANITOBA LAW JOURNAL VOL. 14 guarantee and to cover existing as well as future indebtedness of the com- pany up to the sum of six thousand dollars. It also stated that the guarantor could determine his further liability under the guarantee only by notice in writing to the bank and contained a clause to the effect that the guarantor acknowledged that no representations had been made to him on behalf of the bank. The defence was that, when he signed the guarantee, the defend- ant had received an oral assurance from the plaintiff's assistant branch manager that the guarantee would cover only existing debts of the company and that he would be released from his guarantee when the bank had obtained a joint guarantee from the directors of the company. Such a joint guarantee was acquired some six months after the defendant had executed his guarantee. The Supreme Court decided in favour of the bank. Such a decision was understandable. There was little reason to feel sympathetic towards the defendant, a solicitor, who had failed even to read the guarantee before signing it. If the Court had concluded simply that the alleged oral assurance had not been made or that its exclusion from the contradictory written guarantee indicated that it was not intended to have contractual effect,6° the decision would have been quite unexceptional. Unfortunately, the def- ence was rejected on purely technical grounds. The Court recognized that parol evidence was admissible to establish an independent collateral con- tract but held, relying on nineteenth century English81 and Canadian62 authority, that such a collateral agreement could not be established where it would contradict the main contract. Here the contradictions were numerous. For more than ten years, Hawrish seems to have been regarded as an aberration because it was ignored consistently. In particular, oral assurances were allowed to override written exemption clauses.83 In 1980, however, the Supreme Court affirmed the position it had taken in Hawrish in Bauer v. Bank of Montreal.64 The defendant guarantor guaranteed his company's debts to the plaintiff bank which also took an assignment of the company's book debts. The written guarantee provided that the bank, without releasing the guarantor, could "abstain from taking securities from, or from perfect- ing securities of," the company. The bank neglected to register the assignment of book debts with the result that the security was lost to other creditors. The bank brought an action to enforce the guarantee and the defendant relied inter alla on an oral understanding that the accounts would be pre- served for the benefit of the guarantor and would be assigned to him on payment of the company's debts. The Court, following Hawrish, held that evidence of such an understanding was inadmissible under the parol evi- 60. The Court did doubt whether there was any such intention but did not ground its decision on such a conclusion, ibid., at 605. 61. Lindley v. Lacey, supra n. 18; Morgan v. Griffith, supra n. 20: Erskine v. Adeane, supra n. 20. 62. Byers v. McMillan (1887), 15 S.C.R. 194. 63. For example, Francis v. Trans-Canada Trailer Sales Ltd. (1969), 6 D.L.R. (3d) 705 (Sask. CA.); Sodd Corporation Inc. v Tessis, supra n. 57; Westridge Developments Ltd. v. Can-Am Development Corp. Ltd., 119781 5 W.W.R. 404 (Alta. S.C.): Roberts v. Monies Development Corp., supra n. 57; dicta by the Trial Judge in Ronald Elwyn Lister Ltd. v. Dunlop Canada Ltd., supra n. 52. 64. (1980),110 D.L.R. (3d) 424. 19 84 C an LI ID oc s 14 1 NO. 1, 1984 PRE-CONTRACTUAL MISSTATEMENTS 73 dence rule because it "would clearly contradict the terms of the guarantee which . .. gave the bank the right to abstain from registration and perfec- tion of security."86 The Supreme Court reiterated its views just two years later in Carman Construction Ltd. v. Canadian Pacific Ry. Co.." The plaintiff contractor entered into a contract with the defendant for the excavation and removal by the plaintiff of a section of rock. In submitting its bid, the plaintiff had relied upon an oral representation by one of the defendant's employees as to the quantity of rock to be removed. It transpired that there was a great deal more rock to be removed than had been represented with the result that the plaintiff incurred substantial additional expense. The plaintiff brought an action, inter alia, for breach of a collateral warranty as to the quantity of rock to be removed. The defendant relied upon the terms of the written contract and, in particular, on clause 3.1 which provided: It is hereby declared and agreed by the Contractor that this Agreement has been entered into by him on his own knowledge respecting the nature and conformation of the ground upon which the work is to be done, the location, character, quality and quantities of the material to be removed, the character of the equipment and facilities needed, the general and local conditions and all other matters which can in any way affect the work under this Agreement, and the Contractor does not rely upon any information given or statement made to him in relation to the work by the Company. Both at trial and on appeal the Ontario courts dismissed the plaintiff's claim, with no consideration of the parol evidence rule, on the basis that it was bound by that clause. The Supreme Court, however, after deciding that no collateral contract existed because there was no intention to warrant the accuracy of the estimate and because of the exclusion clause, could not resist invoking the parol evidence rule in the defendant's favour. Martland J., for the Court, said: There is an additional ground for denying the existence of a collateral warranty. Such a warranty, if it existed, would contradict the express terms of the contract as contained in cl. 3.1. This court has held in Hawrish v. Bank of Montreal87 ... that a collateral agreement cannot be established where it is inconsistent with or contradicts the written agreement e8 The Court also cast doubt on the possibility of finding a contract to be partly written and partly oral. Following Heilbut, Symons & Co. v. Buck- leton,69 a collateral warranty was equated with "a contract collateral to the primary agreement."70 This line of Supreme Court authority makes the parol evidence rule a much more formidable barrier to be overcome in Canada than in England by a potential plaintiff. If followed slavishly,71 there is the danger that such an approach will preclude, on technical grounds, a full examination of all 65. /bid., at 431-432. 66. (1982), 136 D.L.R. (3d) 193 (S.C.C.); affg (1981), 124 D.L.R. (3d) 680 (Ont. C.A.); affg (1980), 109 D.L.R. (3d) 288 (Ont. H.C.). 67. Supra n. 59. 68. Supra n. 66, at 201. 69. Supra n. 3. 70. Supra n. 66, at 198. 71. It was followed recently in Bank of Nova Scotia v. Zackheim (1983), 149 D.L.R. (3d) 555 (Ont. H.C.). 19 84 C an LI ID oc s 14 1 74 MANITOBA LAW JOURNAL VOL. 14 the evidence to determine what the parties have agreed. Moreover, such an approach restricts seriously the availability of contractual liability for pre- contractual misstatements and emphasizes the need for some form of tor- tious liability in this area. 2. Contractual Intention If a plaintiff can overcome the hurdles posed by the parol evidence rule, he will not necessarily succeed in an action for breach of contract. All pre- contractual representations made by the defendant will not automatically be classified as contractual terms, whether of a single contract or of some collateral contract. The accepted position is that a representation constitutes a term only if such was the intention of the parties. The requirement of a contractual intention was emphasized by the House of Lords in Heilbut, Symons & Co. v. Buckleton.72 The defendants had underwritten a large number of shares in a new company and they instructed their Liverpool manager to ask some of his Liverpool friends to take shares in the company. The plaintiff heard about the availability of the shares and telephoned the manager for further information. The plaintiff said that he understood that the defendants were bringing out a rubber company and the manager replied that they were. Following the conversation, the plaintiff bought shares in the company. When the shares later declined in value, the plaintiff sought damages for breach of warranty on the basis that the company was not technically a rubber company. The House of Lords, relying heavily on a dictum ascribed to Holt C.J. that: "An affirmation at the time of the sale is a warranty, provided it appear on the evidence to be so intended",73 held that there was no "evidence of an intention on the part of either or both of the parties that there should be a contractual liability in respect of the accuracy of the statement."74 The statement was merely an innocent rep- resentation for which no damages could be recovered. The same decision could have been reached easily without the need to stress the lack of a contractual intention because it was clear that the plaintiff had never relied upon any representation as to the company being a rubber company. The plaintiff's decision to purchase the shares had been influenced rather by the defendants' general reputation. By emphasizing the requirement of a contractual intention, however, Heilbut, Symons marks the clear separation of warranty from its tortious roots and its incorporation into contractual theory. Originally, an action on a warranty was a form of action in deceit.76 A buyer, for example, who bought goods in reliance on the seller's misrepresentations, would succeed if he could establish that the seller had "warranted" the truth of his statements. The action was based not on any promise by the defendant but on the fact that the plaintiff had been misled into acting to his detriment. By making the warranty, the 72. Supra n. 3. 73. Ibid., at 49. See also Pasley v. Freeman (1789), 3 T.R. 51 at 57, 100 E.R. 450 at 453 (per Buller J.) (K.B.) and the discussion by Greig, supra n. 7, at 181-183. 74. /bid., at 51. 75. See Stevens, "Hedley Byrne v. Heller: Judicial Creativity and Doctrinal Possibility" (1964), 27 Mod. L. Rev. 121 at 161- 166; Greig, supra n. 7, at 179-184; Waddams, Products liability (2d ed. 1980) 1-11. 19 84 C an LI ID oc s 14 1 NO. 1, 1984 PRE-CONTRACTUAL MISSTATEMENTS 77 the defendant for the lease to him of a service station on a newly developed site. During the negotiations, an experienced representative of Esso told the defendant that Esso had estimated that the "throughput" of petrol would reach 200,000 gallons in the third year of operation of the station. This estimate was totally unrealistic. It had been reached two years earlier on the assumption that the service station would front on to a main street. In fact, the local planning authority had insisted upon the station being built "back to front" with the result that it was accessible and could be seen only from side streets. This change falsified Esso's calculations but no revision to the original estimate was ever made. The defendant had doubts about Esso's figures but his misgivings were quelled by the greater experience of the company's representative. He entered a tenancy which proved finan- cially disastrous for him. The annual throughput of petrol scarcely ever exceeded 70,000 gallons. When sued for arrears of rent, the defendant counterclaimed, inter alia, for breach of contract. The Court held that Esso had not warranted or guaranteed that the throughput of petrol would be 200,000 gallons per year by the third year of operation. It was reasonable, however, to regard Esso as having warranted that its estimate was sound in the sense that it had been made with reasonable care. Esso was in a position of special knowledge and skill. It had a wealth of experience and expertise at its disposal. It was in a much better position than the defendant to make the forecast and so it was only reasonable to conclude that it had promised that its estimate was reliable. A consideration of the cases decided since Heilbut, Symons & Co. v. Buckleton,84 suggests that the courts, especially in England, have not been unduly hindered by the requirement of a contractual intention from holding a statement to be a contractual term. The absence for many years of any possibility of tortious relief meant that there was a need to use contract to relieve one party from another's misrepresentations. In many ways, the law has reverted to its nineteenth century position where a misstatement by a party with special knowledge which induced the other party to enter into a contract was likely to be treated as a warranty. In Dick Bentley Productions Ltd. v. Harold Smith (Motors) Ltd., Lord Denning M.R. said: ... [11f a representation is made in the course of dealings fora contract for the very purpose of inducing the other party to act on it, and it actually induces him to act on it by entering into the contract, that is prima facie ground for inferring that the representation was intended as a warranty.86 In Esso Petroleum Co. Ltd. v. Mardon,86 Lord Denning M.R. reiterated what he had said in Dick Bentley and admitted openly that the concept of warranty as expounded in Heilbut Symons is often manipulated so as to allow for a remedy in damages to a representee: Ever since Heilbut, Symons & Co. v. Buckleton [ 19131 A.C. 30, we have had to contend with the law as laid down by the House of Lords that an innocent misrepresentation gives no right to damages. In order to escape from that rule, the pleader used to allege — I often 94. Supra n. 3. 95. Supra n. 25, at 67. 96. Supra n. 31. 19 84 C an LI ID oc s 14 1 78 MANITOBA LAW JOURNAL VOL. 14 did it myself — that the misrepresentation was fraudulent, or alternatively a collateral warranty. At the trial we nearly always succeeded on collateral warranty... Besides that experience, there have been many cases since I have sat in this court where we have readily held a representation — which induces a person to enter into a contract — to be a warranty sounding in damages .97 A plaintiff, therefore, can often succeed in an action for breach of contract where the basis of his claim is that he has relied on the defendant's representations to his detriment by entering into a disadvantageous contract rather than that the defendant has guaranteed the truth of his representa- tions.88 The contractual action is being used to enforce what is fundamentally a tortious claim. In New Zealand, this position has been entrenched by statute. Section 6(1) of the Contractual Remedies Act 197999 provides: 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 misre- presentation made negligently, be entitled to damages from that other party for deceit or negligence in respect of that misrepresentation. It is understandable to treat representations inducing a contract as contractual terms in order to provide a measure of relief to a representee. As discussed below, however, relief in tort is now available in the majority of these cases1O0 and so no longer need the law of contract be strained, whether at common law or by statute, so as to protect a representee. Con- tractual damages may be inappropriate in such a case. The normal contractual measure of damages is the expectation interest. The plaintiff is entitled to be put into the position in which he would have been if the contract had been performed, namely the representations had been true. He is to be granted the benefit of his bargain. In tort, on the other hand, the plaintiff is entitled to his "out of pocket" losses. He is to be placed in the position he would have occupied if the tort had not been committed, namely the representations had not been made.1O1 The tortious measure is clearly the more appropriate where the plaintiff is arguing that the defend- ant, through his misrepresentations, has caused the plaintiff to suffer loss by entering into a contract.'°2 It is true that courts, where they believe it to be fitting, have been able to award the tortious measure of damages in a contractual action by finding that the term broken was a promise to use reasonable care in making the statements. Such a case was Esso Petroleum Co. Ltd. v. Mardon103 where 97. Ibid.. at 817. 98. See generally: Taylor, supra n. 10. 99. 1979, No. 11. 100. Tortious relief would not be available in the exceptional case where a plaintiff could not prove negligence on the part of the representor. 10I. See Taylor, supra n. 10: Treitel, supra n. 12, at 266-269. 102. See Taylor, supra n. 10; Reiter, supra n. 10 at 260-263. 103. Supra n. 31. 19 84 C an LI ID oc s 14 1 NO. 1, 1984 PRE-CONTRACTUAL MISSTATEMENTS 79 the English Court of Appeal determined that Esso had not guaranteed that the throughput of petrol would be 200,000 gallons but it had made an estimate upon which it was reasonable for Mardon to rely. The Court, therefore, constructed a warranty consisting of a promise by Esso that it had used reasonable care in formulating its forecast. In this and similar cases, however, it would make more sense to found liability solely in tort and to impose contractual liability only where it is appropriate for the plaintiff to be compensated for his loss of bargain.104 B. Rescission for Misrepresentation105 A victim of a pre-contractual misrepresentation may be able to rescind the ensuing contract between the parties and thereby restore the status quo. This equitable remedy will rarely, however, prove to be the most satisfactory way of protecting a representee. In the first place, a representee may feel that he is best served by the recovery of damages but, to claim damages, he will have to establish that a breach of contract or a tort has been com- mitted. In rescinding, a representee may be able to claim an indemnity from the representor in respect of obligations created by the contract,'°6 but such an indemnity is only a part of the process of rescission and does not resemble damages in any way. In England, by statute, a court may award damages in lieu of rescission,107 but no such option is available to a Canadian court. Secondly, rescission may work an injustice on the representor by requir- ing the setting aside of a transaction for what may be a comparatively minor transgression. It can be a harsher remedy than damages, especially where the parties have performed, or started to perform, the contract between them. It is because of the potentially severe effects of rescission that various bars exist upon its exercise. In particular, rescission is no longer available if the contract has been affirmed,1O8 if innocent third parties have acquired rights under the contract,108 if substantial restitution of benefits received is impossible10 and perhaps merely if undue time has elapsed.'" Moreover, it is often stated that an executed contract cannot be rescinded in the absence of fraud or of error in substantialibus.112 Nobody is quite certain of the operation of this particular bar, which has been abolished in Eng- land.113 It has been avoided on occasions by a generous interpretation of what constitutes error in substantialibus114 and by restricting it to contracts 104. See Taylor, supra n. 10 at 141-142. 105. See generally: Furmston, Cheshire and Filaot's Law of Contract (10th ed. 1981) 237-266; Treitel, supra n. 12, at 243-291; Waddams, The Law of Contracts (1977) 248-257. 106. For example, Whittington v. Seale-Hayne (1900). 82 L.T. 49 (Ch.D.). 107. Misrepresentation Act 1967, c. 7, s. 2(2) (U.K.). 108. For example, United Shoe Machinery Co. of Canada v. Brunet, [ 1909] A.C. 330 (P.C.). 109. For example, Lewis v. Averay, [ 1972) 1 Q.B. 198 (C.A.). 110. For example, Thurston v. Strei/en, [1951] 4 D.L.R. 724 (Man. K.B.). 111. For example, Leaf v. International Galleries, [1950] 2 K. B. 86 (C.A.). 112. For example, Redican v. Nesbitt, [ 1924] S.C.R. 135. 113. Misrepresentation Act 1967,c. 7, s. 1(b) (U.K.). 114. For example, Alessio v. Jovica (1973), 42 D.L.R. (3d) 242 (Alta. S.C., App. Div.). 19 84 C an LI ID oc s 14 1 82 MANITOBA LAW JOURNAL VOL. 14 It is not easy to extract from the decision the basis upon which a duty of care will be imposed in respect of negligent misstatements causing finan- cial loss.127 The House of Lords stressed the fact that, for a duty of care to arise, the informant must have assumed responsibility for the exercise of reasonable care in making his statements.128 On this basis, therefore, the duty of care is not imposed but is undertaken voluntarily by the defendant. Lord Reid, for example said: So it seems to me that there is good sense behind our present law that in general an innocent but negligent misrepresentation gives no cause of action. There must be something more than the mere misstatement ... The most natural requirement would be that expressly or by implication from the circumstances the speaker or writer has undertaken some responsibility, ...1R8 The emphasis upon an assumption of responsibility by the representor means that, in some respects, liability in tort for negligent missatement is akin to a contractual liability. Lord Devlin made the connection between tort and contract in this context quite explicit: [T]here is ample authority to justify your Lordships in saying now that the categories of special relationships which may give rise to a duty to take care in word as well as in deed are not limited to contractual relationships or to relationships of fiduciary duty, but include also relationships which in the words of Lord Shaw in Nocton v. Lord Ashburton, 119141 A.C. 932 at 972, are 'equivalent to contract,' that is, where there is an assumption of responsibility in circumstances in which, but for the absence of consideration, there would be a contract.130 Of course, rarely will a defendant expressly assume responsibility for the accuracy of what he says. The major question to be resolved, therefore, is under what circumstances will it be inferred that a defendant has assumed such a responsibility. In determining this question, a court is in effect decid- ing whether or not a duty of care should be imposed upon the defendant. As a practical matter, therefore, it makes little difference whether the duty of care is regarded as assumed or imposed, except perhaps when the issue is raised as to the effect of an express disclaimer by the defendant. If the duty is assumed, then a disclaimer must operate to prevent such an assump- tion of responsibility. If, on the other hand, the duty is imposed, then arguably a disclaimer can operate only as a defence to a breach of duty. In the latter situation, a disclaimer would presumably be subjected to a much more rigorous scrutiny by the courts. Lord Reid gave the broadest view of when the defendant would be under a duty of care in respect of statements made by him. He could see: [Nlo logical stopping place short of all those relationships where it is plain that the party seeking information or advice was trusting the other to excercise such a degree of care as the circumstances required, where it was reasonable for him to do that, and where the other gave the information or advice when he knew or ought to have known that the inquirer was relying on him.13' In general, therefore, a defendant will be taken to have assumed a duty of care where it is reasonable for a party to rely on the defendant's statements. 127. For an excellent discussion of this question. sec Feldthusen, "Negligent Misrepresentation: A Closer Look at the Basis of the Defendant's Duty of Care" in Issues in Ton law (Steel and Rodgers-Magnet ed. 1983) 179-217. 128. /bid., at 192-194. 129. Supra n. I, at 483. 130. Ibid., at 528-529. 131. /bid., at 486. 19 84 C an LI ID oc s 14 1 NO. 1, 1984 PRE-CONTRACTUAL MISSTATEMENTS 83 The language used by the other Law Lords was not as broad as that of Lord Reid but it is very much to the same effect. Lord Morris, for example, said: My Lords, I consider that it follows and that it should now be regarded as settled that if someone possessed of a special skill undertakes, quite irrespective of contract, to apply that skill for the assistance of another person who relies upon such skill, a duty of care will arise. The fact that the service is to be given by means of or by the instrumentality of words can make no difference. Furthermore, if in a sphere in which a person is so placed that others could reasonably rely upon his judgment or his skill or upon his ability to make careful inquiry, a person takes it upon himself to give information or advice to, or allows his infor- mation or advice to be passed on to, another person who, as he knows or should know, will place reliance upon it, then a duty of care will arise.12 To a large extent, the House of Lords was content to recognize generally the existence of a tort of negligent misstatement but to leave its precise scope to be drawn by later decisions. The House of Lords did, however, draw a distinction between statements made on social or informal occasions and those made in a professional or business connection. Lord Pearce said that: "To import . . . a duty the representation must normally, I think, concern a business or professional transaction whose nature makes clear the gravity of the inquiry and the importance and influence attached to the answer."133 This common sense distinction, however, was employed by the majority of the Privy Council in Mutual Life and Citizens' Assurance Co. Ltd. v. Evatt134 to restrict severely the potentially very broad principle laid down in Hedley Byrne. The plaintiff, who was a policy holder in the defendant insurance company, sought advice from the defendant as to the financial stability of a closely associated company. In reliance upon that advice, the plaintiff did not realize upon certain investments existing in that associated company and indeed invested further sums of money. The advice was unre- liable and the plaintiff lost his money. The plaintiff's claim under Hedley Byrne was dismissed on the ground that the plaintiff had not alleged that the defendant either carried on the business of advising on investments or in some other way had claimed to possess the necessary skill and competence to do so and was prepared to exercise the necessary diligence to give reliable advice. The majority judgment was based on the notion that a duty of care in this context was the same as a "duty to conform to an ascertainable standard of skill and competence in relation to the subject-matter of the advice."135 Hedley Byrne liability, therefore, could be attracted in the main only by those who carry on a "business or profession which involves the giving of advice which calls for special skill and competence"136 and where the advice given is in pursuance of that business or profession. In that way, the adviser has let it be known that "he claims to possess the standard of 132. Ibid.. at 502-503. 133. Ibid., at 539. Sec also Lord Reid. ibid.. at 482-483. John Bosworth Ltd. v. Professional Syndicated Developments Ltd. (1979). 97 D.L.R. (3d) 112 (Ont. H.C.) is a recent illustration of a court denying a duty of care in respect of statements made on a social occasion. 134. 119711 A.C. 793 (P.C.) (N.S.W.). 135. Ibid.. at 803. 136. Ibid., at 805. 19 84 C an LI ID oc s 14 1 84 MANITOBA LAW JOURNAL VOL. 14 skill and competence and is prepared to exercise diligence which is generally shown by persons who carry on the business of giving advice of the kind sought."137 The majority also recognized that it would be possible for an adviser to let it be known in some way other than the carrying on of a business or profession that: ... [Me claims to possess skill and competence in the subject-matter of the particular inquiry comparable to those who do carry on the business or profession of advising on that subject- matter and is prepared to exercise a comparable skill and competence in giving the advice.'" The effect of the majority decision, therefore, was to restrict Hedley Byrne liability to those professing to have some special skill. The vigorous dissenting judgment of Lords Reid and Morris castigated the reasoning of the majority. They said: We can see no ground for the distinction that a specially skilled man must exercise care but a less skilled man need not do so. We are unable to accept the argument that a duty to take care is the same as a duty to conform to a particular standard of skill. One must assume a reasonable man who has that degree of knowledge and skill which facts known to the inquirer (including statements made by the adviser) entitled him to expect of the adviser, and then inquire whether such a reasonable man could have given the advice which was in fact given if he had exercised reasonable care.'as This dissenting judgment was all the more powerful because both Lord Reid and Lord Morris had delivered leading judgments in Hedley Byrne itself. If it had been applied strictly, Evatt would have operated as a very serious limitation on Hedley Byrne liability in general and would have made it especially difficult to impose tortious liability in respect of pre-contractual misstatements.140 Fortunately, Evatt has not been treated with the greatest of respect.141 In two decisions, the English Court of Appeal has indicated that it views itself as quite free to reject the Privy Council decision. In Esso Petroleum Co. v. Mardon,142 Ormrod L.J. said quite explicitly that he would apply the minority view in Evatt. He thought that if "the majority view were to be accepted, the effect of Hedley Byrne would be so radically curtailed as to be virtually eliminated."143 It is true that Lord Denning M.R. did approve of the majority judgment in Evatt but his judgment undoubtedly extended the majority judgment in Evatt. In particular, he widened Evatt to include those with special knowledge as well as those with special skill. Only two years later, however, in Howard Marine & Dredging Co. Ltd. v. A. Ogden & Sons (Excavations) Ltd.,144 Lord Denning M.R. stated unequivocally that he preferred the reasoning of the minority in Evatt.145 Shaw L.J. agreed with Lord Denning M.R. on this point.'46 137. Ibid., at 804. 138. Ibid., at 806. 139. Ibid., at 812. 140. See generally: Schwartz, supra n. 122. 141. See Irvine, Annot. (1980), 13 C.C.L.T. 202. 142. Supra n. 31. 143. Ibid., at 827. 144. Supra n.86. 145. Ibid., at 591. 146. Ibid., at 600. 19 84 C an LI ID oc s 14 1 NO. 1, 1984 PRE-CONTRACTUAL MISSTATEMENTS 87 2. Duty of Care in respect of Pre-Contractual Misstatements After Hedley Byrne had been decided, the question arose as to whether the principle laid down by the House of Lords in that case could be applied to misrepresentations inducing the formation of a contract between the representor and representee. This would, in effect, do away with the rule that there could be no damages for what contract would regard as a purely innocent misrepresentation.162 Hedley Byrne, itself, did not solve this ques- tion. Lord Reid, for example, implied that Hedley Byrne could not apply to contracting parties because the question there would be simply whether the particular statement amounted to a contractual term.t63 Lord Hodson went further and said: [T]hat it may in certain cases appear to be strange that, whereas innocent misrepresen- tation does not sound in damages, yet in the special cases under consideration an injured party may sue in tort a third party whose negligent misrepresentation has induced him to enter into the contract!" It seems implicit in this statement that Hedley Byrne does not apply as between the people who ultimately enter into a contract. On the other hand, Lord Devlin said that "wherever there is a relationship equivalent to con- tract, there is a duty of care."165 As one commentator has pointed out, the relationship between parties in the process of contracting must be one which is equivalent to contract.ls6 In the aftermath of Hedley Byrne, some writers expressed serious doubts as to the applicability of that decision to pre-contractual negotiations. Pro- fessor Glasbeek, for example, said that, when the parties are negotiating about a contract, then "it is fair to postulate that neither of the parties is willing to assume responsibility for anything he does not in fact specifically endorse by inclusion in the contract."1fi7 In other words, negotiating parties are assumed to be operating at arm's length and are seeking to extract the best possible bargain from the other side. They are willing to take respon- sibility only for those obligations expressed in the contract. There is, therefore, little room for the operation of tort principles in this context. In those cases where it can be said that a representor has assumed responsi- bility for the truth of his representation, his statement will almost certainly be treated as a contractual term and hence a contractual remedy will lie.188 Professor Honoré made this point succinctly: If in the circumstances it can be inferred that one party assumes responsibility for the truth of a statement made to the other, the law of contract, independently of Hedley Byrne, imposes a liability sounding in damages. If, on the other hand, a statement is treated as a mere representation ... this is because there is no such inference implicit in the circumstan- ces of the case!" 162. For example. Stevens, supra n. 75, at 155-160. 163. Supra n. I, at 483. 164. /bid., at 51 1. 165. Ibid.. at 530. 166. Weir, "Liability for Syntax", ( 1963] Camb. L.J. 216 at 220. 167. Glasbeek, "Limited Liability for Negligent Misstatement" in Studies in Canadian Ton Law (Linden ed. 1968) 1 15 at 131. 168. /bid., at 131-132. 169. (1965), 8 J.S.P.T.L. 284 at 296-297. See also Coote, "The Effect of Hedley Byrne" (1967), 2 N.Z.U.L. Rev. 263 at 276- 277. 19 84 C an LI ID oc s 14 1 88 MANITOBA LAW JOURNAL VOL. 14 On this theory, therefore, Hedley Byrne has a negligible effect on liability for pre-contractual misstatements. It will be limited to what Professor Honoré sees as the rare situation where the representor assumes a duty of care but does not guarantee the truth of what he says. It is true that for about 10 years Hedley Byrne was not seized upon by the courts as a means of imposing liability for pre-contractual misstate- ments. Even in those cases which accepted the possibility of Hedley Byrne liability being imposed in the pre-contractual context, it was recognized that Hedley Byrne's sphere of operation would necessarily be limited. In Dillingham Constructions Pty. Ltd. v. Downs,170 for example, the plaintiffs entered into a contract with the defendant, the New South Wales Govern- ment, for the deepening of a harbour. The contract took much longer to complete than expected because initial blasting to break up the harbour floor was ineffective and other procedures had to be used. The plaintiffs later discovered that there were disused coal workings under the harbour and concluded that the blasting had been ineffective because its effect had been dissipated throughout the underground workings. The defendant had known of these disused coal workings all the time. The plaintiffs sued the defendant inter alia for negligent misrepresentation inducing them to enter into the contract. The Court determined that the mere fact that the parties were in a pre-contractual relationship did not automatically preclude the application of Hedley Byrne. In particular, the nature and extent of the specialized knowledge in the defendant's possession, which would have been of vital importance to the plaintiffs, rendered Hedley Byrne potentially applicable. In the final analysis, the plaintiffs' claim was dismissed because, on the facts, the defendant had not assumed responsibility for providing the plaintiffs with accurate or full information as to special site conditions nor with advice as to difficulties likely to arise in the carrying out of the project. Also, the plaintiffs had not relied upon the defendant to supply any such information or advice. For present purposes, the importance of the judgment lies in the fact that the Court indicated that a pre-contractual relationship would not normally qualify as a special relationship within Hedley Byrne because a "person in pre-contract negotiations is entitled to and usually does seek to make the most advantageous deal he can. The other party does likewise; thus each is at liberty to have regard solely to his own interests."171 It is wrong to deny Hedley Byrne a role to play in a pre-contractual relationship or to conclude that it is unnecessary to rely upon Hedley Byrne in that context because the contractual remedies are adequate. The prob- lems with establishing contractual liability in respect of pre-contractual misstatements have already been observed in the first part of this paper. Traditionally, there have been difficulties with overcoming both the parol evidence rule and the strict test of contractual intention as laid down in Heilbut, Symons & Co. v. Buckleton.172 More recently, some courts have been prepared to invent collateral warranties in order to protect a represen- 170. (1972] 2 N.S.W.L.R. 49 (S.C.). 171. /bid., at 55. See also Ellu! v. Oakes, supra n. 87 at 380 (per Bray C.J.) (S.C.). 172. Supra n. 3. 19 84 C an LI ID oc s 14 1 NO. 1, 1984 PRE-CONTRACTUAL MISSTATEMENTS 89 tor who has relied upon pre-contractual misstatements. Lord Denning M.R., in Esso Petroleum Co. Ltd. v. Mardon, made this point very clearly: ... (T] here have been many cases since I have sat in this court where we have readily held a representation — which induces a person to enter into a contract — to be a warranty sounding in damages.'" Where the basis of a plaintiff's claim is that the defendant, through his misrepresentations, has caused the plaintiff to suffer loss by entering into a contract, it makes little sense to invent a contractual remedy where a tortious one is at hand. The plaintiff's claim is fundamentally a tortious one and should be recognized as such. Moreover, by allowing an action in tort, a court is less likely to award an inappropriate measure of damages, namely the expectation measure. One of the leading cases where contractual dam- ages were awarded is Dick Bentley Productions Ltd. v. Harold Smith (Motors) Ltd..'" The English Court of Appeal held that a pre-contractual statement by a car dealer to a prospective purchaser that the car in question had done only 20,000 miles since it had been equipped with a new engine and gearbox constituted a contractual term. In determining that it was reasonable to construe the defendant's statement as a warranty, the Court applied a test much more in accordance with Hedley Byrne than Heilbut, Symons. Lord Denning M.R. said: Here we have a dealer, Mr. Smith, who was in a position to know, or at least to find out, the history of the car. He could get it by writing to the makers. He did not do so. Indeed it was done later. When the history of this car was examined, his statement turned out to be quite wrong. He ought to have known better. There was no reasonable foundation for it.'" The need for Hedley Byrne to apply to pre-contractual misstatements is all the greater in Canada because of the absence of a statutory remedy such as that contained in section 2(1) of the English Misrepresentation Act 19671" which provides: Where a person has entered into a contract after a misrepresentation has been made to him by another party thereto and as a result thereof he has suffered loss, then, if the person making the misrepresentation would be liable to damages in respect thereof had the misre- presentation been made fraudulently, that person shall be so liable notwithstanding that the misrepresentation was not made fraudulently, unless he proves that he had reasonable ground to believe and did believe up to the time the contract was made the facts represented were true. This statutory remedy has definite advantages over a common law claim under Hedley Byrne. There is no need for the plaintiff to establish that a special relationship exists between himself and the defendant. More- over, the section places the burden on the defendant to show that he had reasonable grounds to believe that his representation was true.17 On the other hand, the statutory remedy applies only, it seems, to misstatements of fact and will not be available where no contract is in fact formed between the parties. 173. Supra n. 31, at 817. 174. Supra n.25. 175. /bid., at 67. 176. 1967, C. 7 (U.K.). 177. The defendant failed to discharge this burden, for example, in Howard Marine and Dredging Co. Ltd. v. A. Ogden & Sons (Excavations) Ltd., supra n. 86. 19 84 C an LI ID oc s 14 1 92 MANITOBA LAW JOURNAL VOL. 14 to which such a clause can, and should be able to, protect a defendant from the consequences of his misrepresentations. These questions are not the subject of the present paper. For the moment, suffice it to say that a court should be wary of allowing a defendant too readily to avoid the conse- quences of his own misstatements when they have induced the plaintiff to enter into the very contract upon which the defendant is relying to protect himself. Finally, there are still some unanswered questions as to the extent to which Hedley Byrne can operate in the pre-contractual context. In partic- ular, can there be liability for a negligent pre-contractual misstatement which does not in fact lead to the formation of a contract? This question arose for consideration in the New Zealand case of Holman Construction Ltd. v. Delta Timber Co. Ltd..'94 In that case, the defendant offered to supply the plaintiff with timber at a set price for a building project to be carried out by the plaintiff. The plaintiff relied on that offer and entered a building contract. The defendant then realized that it had miscalculated and revoked its offer. The plaintiff was forced to accept the next lowest tender and he sued the defendant in Hedley Byrne for the difference between the two tenders. The plaintiff's action was dismissed on the basis that no duty of care was owed by the defendant in these circumstances. The Court said that to allow the action to succeed would be to subvert the rules of offer and acceptance. The offeree should either have accepted the offer or have ensured in some way that it could not be revoked. Henry J. said: Even if one treats the offer in a manner most favourable to the plaintiff it is only advice to the plaintiff that the defendant is prepared, if the plaintiff accepts the offer, to supply timber on the terms stated. It is not a representation that a careful or even an honest assess- ment of the price asked has been made. It is not advice that the offer will remain open for any specified time. It is no more than the expression of an intention to become bound by contract if the offer be accepted. The offeror can be under no duty to make vis-a-vis the offeree a careful estimate of the price he seeks. It is for the offeree to judge the worth of the offer and to accept it while it is still capable of acceptance if he wishes to create any duty on the offeror. It is then no more than a contractual duty in terms of the contract)" Despite the developments which have taken place since this case was decided, it is submitted that the decision is still a good one for the reasons given by the Judge. A person should be able to make any offer he likes, however foolish and however negligently prepared. Only if his offer is accepted, should he have to bear the consequences of his stupidity or carelessness. In other situations, it may be entirely appropriate to award damages under Hedley Byrne even though no contract in fact follows. Such a situ- ation was presented in Box v. Midland Bank Ltd.,186 where the plaintiff was advised by the defendant's branch manager that his application for a loan would have to be referred to Regional Head office for approval but 194. [1972] N.Z.L.R. 1081 (S.C.). 195. /bid., at 1082. 196. [1979] 2 Lloyd's Rcp. 391 (Q.B.). 19 84 C an LI ID oc s 14 1 NO. 1, 1984 PRE-CONTRACTUAL MISSTATEMENTS 93 that there would be no difficulties with a loan being granted. This was not the case, as the branch manager should have known, and the loan was refused. The plaintiff sought to recover from the defendant losses incurred as a result of relying upon the branch manager's negligent advice. The Court held that the defendant was liable on the basis of Hedley Byrne. It was held that, on the facts of the case, the plaintiff had reasonably relied upon the branch manager's prediction as to the outcome of the application for a loan. IV. Conclusion The position has thus been reached that a party, induced to enter into a contract by another's misrepresentations, is potentially protected in both contract and tort. Through a combination of both contractual and tortious remedies, there are very few situations in which a deserving plaintiff will fail. Traditionally, there were gaps in a representee's contractual protection which could be filled only by distorting principles of contract law through the invention of contractual terms. The availability of relief in tort, however, has rendered such distortion unnecessary. Contract can thus be used where the basis of the plaintiff's claim is that the defendant has guaranteed that a certain event will occur or that a certain statement is true. Tort can be used where the basis of the plaintiff's claim is that he has relied to his detriment upon the defendant's negligent misrepresentations by entering into a disadvantageous contract. 19 84 C an LI ID oc s 14 1 19 84 C an LI ID oc s 14 1