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Chapter I

The Seller's Responsibilities For What He Says:
Express Terms

First Report of the Consumer Protection Project
Consumer Guarantees in the Sale or Supply of Goods
Department of Justice, New Brunswick, 1974
Reproduced with permission of the Department of Justice

First Report

  • Chapter I The Seller's Responsibilities For What He Says: Express Terms

Table of Contents

Preface

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KARL J. DORE
FACULTY OF LAW
THE UNIVERSITY OF NEW BRUNSWICK
FREDERICTON, N.B.

April 10, 1974.

Hon. John B.M. Baxter, Q.C.,
Minister of Justice,
Province of New Brunswick,
Fredericton, New Brunswick.

Dear Mr. Minister:

It is my pleasure to present the first report of the Consumer Protection Project, which concerns consumer contracts for the sale or supply of goods. The Report recommends major reform of the existing law so as to give greater protection to consumers. This involves giving the consumer greater rights, making him aware of these rights, and giving him practical remedies so that he can enforce these rights. A general summary of our main recommendations is found starting at page 212.

A progress report on the remaining parts of the Consumer Protection Project is found in Part II of this Report, starting at page 233.

I have had the good fortune to receive assistance from many persons in this Project, so much in fact that I have decided to use "we" rather than "I" in the body of the reports. "We" always means me, and in many cases includes one or more other persons. In [-7-] this Report I have received particularly valuable assistance from Professor Richard W. Bird, one of my colleagues at the University of New Brunswick Law School, and Mr. Gordon Bennett, formerly a solicitor with the Department of Justice and now of London, England, where he plans to join the English Bar.

Respectfully submitted,

Karl J. Dore
Director,
Consumer Protection Project,
Law Reform Division,
Department of Justice,
Province of New Brunswick

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CHAPTER I
THE SELLER'S RESPONSIBILITIES FOR WHAT HE SAYS: EXPRESS TERMS

1. INTRODUCTION

In this part of the Report we are primarily concerned with the seller's responsibilities to the consumer for what he says about the goods. These responsibilities depend largely on whether what he says is a term of the contract.

The terms of a contract may be express or implied. Express terms (often called express guarantees or warranties) arise out of what has been said in so many words, whereas implied terms do not necessarily depend on what the parties say but may arise from other circumstances such as the conduct of the parties. We shall deal with express terms in this chapter and with implied terms in the next chapter.

[- 11 -] It should be stated at the outset that one of the most fundamental principles of the law is the principle of freedom of contract. Under this principle it is left largely to the parties to the contract to decide what its terms will be, and for the courts to enforce the resulting contract. It is always important, therefore, to discover what the intention of the parties is, for it is their intention that plays the major role in determining what the terms of the contract are.

In this context, however, intention is determined objectively not subjectively. That is, the intention of a person is taken to be, not what he himself thought in his innermost mind, but rather what the person he was dealing with would reasonably take to be his intention based on what he said and did and the other circumstances of the case. <1>

Furthermore, there is no requirement that the parties to a contract must go over with each other and agree separately on each individual term. One party may draw up the terms in advance and simply have the other party sign the document, in which case normally the person who signs the document will be bound by its terms even though [- 12 -] he did not read the document and did not know of all its terms. <2> In some cases, therefore, a person may be deemed to agree to a term of a contract even though he was unaware of its existence.

It should also be stressed that the courts will not refuse to enforce a contract, or a term of the contract, simply because they think it is unfair or unreasonable. <3> Under the freedom of contract principle what is fair and reasonable is generally left to the parties to the contract to decide. We shall deal with this in greater detail later in this Report. <4>

2. PROBLEMS IN THE PRESENT LAW

The seller's responsibilities for what he says, then, depend on whether he can be taken to intend to undertake contractual responsibility for what he says. In some cases his intention will be quite clear. But in other cases it will not be clear at all. We shall deal with these difficulties in the following pages.

[- 13 -] Another difficulty we shall deal with is the way in which courts go about finding out intention.

We shall deal first with the seller's promises and then with his representations of fact.

3. PROMISES

The courts are very ready to find that the seller intends to undertake contractual responsibility for his promises, whether or not he goes on to expressly undertake responsibility for them.

However, if the contract is in writing, and the seller makes a promise that is not recorded in the writing, the buyer may find that the seller escapes liability by virtue of the parol evidence rule.

(a) Parol Evidence Rule

The parol evidence rule has been judicially stated as follows:

... 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 written instrument was made, or during the time that it was in a state of [-14-] preparation, so as to add to or subtract from, or in any manner to vary or qualify the written contract ... <5>

In the form in which it is stated the rule appears tautologous because it only applies if the parties meant to reduce the (entire) contract to writing and this is the very question before the court in cases where it is alleged that the contract is partly written and partly oral. However, the point is that a court readily assumes that the parties meant to reduce the entire contract to writing if the writing looks complete. And if the writing states that it records the entire agreement between the parties, the court is of course even more ready to hold parol evidence inadmissible. <6>

The parol evidence rule has its merits. It allows the parties, who may have engaged in protracted negotiations during which many changes in position take place, to finally make clear what the terms shall be and to record them so as to minimize problems of proof. Furthermore, it not only allows the parties themselves to rely on the writing with some certainty, but in addition it allows third parties (assignees, for example) to do so.

[- 15 -] There are also many exceptions to the rule to take care of some of the problem cases that would otherwise arise. For example, if the parties make a mistake in recording the terms, the parol evidence necessary to show that mistake is admissible and the document can be rectified. Another exception is the so-called independent collateral contract. However, the courts will not allow the collateral contract to contradict the written contract. <7>

Nevertheless, in consumer cases it cannot be doubted that a too ready application of the parol evidence rule is bound to produce unfair and unrealistic results. This is because many (perhaps most) written contracts are drawn up by the seller alone and are neither read over nor expected to be read over by the consumer before he signs the contract. To hold that standard form documents preclude a consumer from relying on an oral promise as a term of the contract, even when the document contains a clause stating that it represents the entire contract and that there are no other terms, is to allow a seller to make and break promises with impunity, notwithstanding that he made the promise to induce the sale, that he knows the consumer will rely on the promise, that the consumer did rely on the promise, and that the consumer paid for [- 16 -] the performance of the promise. It is to place all the legal importance on the piece of paper although the parties themselves obviously placed importance on the oral promises as well. It is, therefore, with respect, to arrive at a decision that is unjust and unrealistic.

There have indeed been encouraging signs that some judges will refuse to apply the parol evidence rule in such cases and will hold the seller to his oral promise. <8> This is not by any means universal, however. Many judges would hold, and many more lawyers would assume, that the parol evidence rule would apply to prevent enforcement of the oral promise.

The Ontario Law Reform Commission has accordingly recommended that the parol evidence rule should be abolished for consumer transactions. <9> What should New Brunswick do?

Against abolition, it may be argued that the parol evidence rule promotes certainty and minimizes proof problems. Its abolition might create more problems than are solved. Indeed, people might be encouraged to take even less care than they presently do before signing written contracts [- 17 -] and to rely even more on oral promises, which they might have difficulty in proving, rather than insisting that these promises be recorded in the written contract. What is needed is more care by consumers. They should read the contract before they sign it and insist that all the promises are recorded in the written contract. Perhaps they could be educated to do so.

We have given careful consideration to these arguments, but in our view the arguments for abolition are stronger.

For abolition, it may be countered that the parol evidence rule tends to prevent the courts from finding the true agreement between the parties in consumer cases. There is a fundamental difference between the situation where two parties get together and write down the terms of their contract and the one where the seller prepares the document himself and simply gets the consumer to sign it. In the latter case, to say that it is only what is contained in the piece of paper that counts, is to allow one party to take advantage of the other. The seller surely should not be able to avoid responsibility simply by having the consumer sign a written document that is neither read nor expected to be read, the consumer all the while relying on the seller's oral promises.

[- 18 -] Of course, there still remains the argument that the buyer should read the document before he signs it and really has only himself to blame if he does not. But is this really true? Is it reasonable to expect a consumer to sit down and read in advance and to understand every written document before he signs it? Although clearly he is best advised to do so, we know of no consumer who follows this practice in every case. There are many reasons for this, including simple reliance on the seller's word, the time it takes to read a long document let alone understand it, inability to comprehend or change in any event, and no encouragement (perhaps active discouragement) by the seller to read the document before signing.

There remains the important proof problem. If, notwithstanding the written document, oral promises are enforceable, is there not a danger that consumers will be encouraged to rely on oral promises without bothering to get them in writing so as to avoid difficulties in proving the promise? The proof problem, however, is hardly something that is not evident to everyone concerned. Under any system, as far as proof is concerned, the consumer is in a better position if the promise is in writing. Under the present system, however, the consumer may be denied even the opportunity to prove the oral promise. If he had that opportunity, he might be able to convince [- 19 -] the judge that a promise was in fact made. It is, indeed, not uncommon for a case to be won or lost on the evidence of one party.

Of course, just as there are unscrupulous sellers there are also unscrupulous consumers, and it may be objected that the door will be opened to the unscrupulous consumer. The present rule favours the unscrupulous seller. Its abolition would favour the unscrupulous consumer. And since there are more consumers than there are sellers, it might work out that there are more successful lies after abolition than before. Such speculation, however, ignores the fact that it is not simply the number of unscrupulous persons but as well the number of contracts that are made by such persons that counts. It is therefore very inconclusive.

More significant and more conclusive, in our opinion, is that we think the present rule favours an unscrupulous seller more than its abolition would favour an unscrupulous consumer. This is because we think it is much more difficult to convince a judge that a promise was made than it is to rely on the present parol evidence rule.

[- 20 -] Our conclusion is that there would be a net improvement if the parol evidence rule were abolished in consumer transactions and we so recommend. This would not mean that a seller could never retract a promise that was made during the course of negotiations. Rather it would mean that in order to retract such a promise he would have to make this clear to the consumer before the contract was made, and would not be able to escape liability for his promise simply by hiding behind a piece of paper containing a clause stating that it contains the entire contract.

The final question is the effect of the abolition of the parol evidence rule on third parties, who may rely on the written document in complete ignorance of the seller's verbal promises. Those most likely to be affected in practice are assignees of the seller, which are almost invariably financing institutions. The present parol evidence rule gives protection to these assignees, and this is one of the reasons given in support of the parol evidence rule. We shall deal fully with the rights of assignees in a later report. Suffice it to say for now that, in our opinion, assignees should acquire no greater rights against the consumer than their assignor, the seller, had. Their complaint should be against the seller, not [- 21 -] the consumer. However, even if it were decided that assignees should be given full rights against the consumer as well as the seller, this should not affect the position between the consumer and his seller.

(b) "No Authority" Clauses

Sellers who employ salesmen sometimes insert a clause in printed form contracts which provides that the salesman has no authority to vary the terms of the written contract. Such clauses allow a seller to enjoy the business advantages of the salesman without shouldering the legal responsibility that should go with it. We share the opinion of the Ontario Law Reform Commission that such clauses are unfair and unreasonable and should be denied effect. <10> Instead, the normal agency rules should govern, whereby the seller would be liable for anything within the salesman's usual or apparent authority.

4. REPRESENTATIONS OF FACT

(a) Present Law

Whatever difficulties a consumer may have in showing a promise to be a term of the contract, he will have even [- 22 -] greater difficulty in showing a representation of fact to be a term of the contract. The courts are much more willing to hold that a promise must have been intended to be a term of the contract than they are to hold that a statement or representation of fact must have been intended to be a term. For example, it is easier for the consumer if the seller promises that the car he is selling is a 1973 model than it is if he simply states that it is a 1973 model. In either case, of course, the legal question is the same, viz. whether the statement was intended to be a term, but this intention test is very difficult to apply to many statements of fact. In practice, therefore, the courts have had to devise certain subsidiary tests to help them in their determination of whether a party intended or must be taken to have intended to undertake contractual responsibility for the statement.

Before turning to these subsidiary tests, however, we should like to discuss a further complexity, arising from the fact that although promises do not generally give rise to any rights unless they are held to be terms of the contract, statements of fact that turn out to be false may give rise to rights even though they are not held to be terms of the contract. A comparison of these rights with those given by the law of contracts is useful.

[- 23 -] "Mere representations," as they are called in the law to distinguish them from representations that are terms of the contract, do not automatically give rise to rights in every case. Indeed, in order for a mere representation to have any legal effect, it must have been a representation of a material fact that induced the consumer to enter into the contract. The consumer's rights in respect of such misrepresentations of fact may vary depending on whether the seller made the misrepresentation innocently, negligently, or fraudulently.

The only remedy available for a mere innocent misrepresentation is rescission. In this context rescission means the right to cancel the contract, return the goods, and recover any money paid on the purchase price. <11> Furthermore, this remedy may be lost very easily. For example, it is still unsettled to what extent the performance of the contract affects the remedy. Mere execution of the contract is not a bar to rescission for fraudulent misrepresentation, but it may be for innocent misrepresentation. Judicial opinion conflicts. <12> If it is a bar there [- 24 -] is an important exception, and that is a misrepresentation that goes to the entire subject matter of the contract. It must be stated, however, that this exception is easier to state than it is to apply. <13> The remedy of rescission will clearly be lost if the buyer has affirmed the contract or if restitutio in integrum is impossible, that is, if the subject matter of the contract cannot be restored (the court can, however, make some monetary allowance for deterioration). Furthermore, rescission for innocent misrepresentation will not be granted if the buyer has lost his right to reject the goods for breach of conditions under the Sale of Goods Act. <14>

For fraudulent misrepresentations, the buyer is not restricted to rescission, but has the additional or alternative remedy of damages. The most that can be recovered by way of damages, however, is whatever money is required to place the buyer in the position [- 25 -] he was in before the fraudulent representation was made. Damages are not awarded on the basis that the buyer is entitled to be placed in the position he would have been in had the representation been true. The buyer is entitled to the latter measure of damages only if the representation is held to be a term of the contract.

The buyer's remedies for negligent (or careless) misrepresentations are unclear. Until very recently, the common law restricted itself to the twofold classification, innocent or fraudulent, at least where the misrepresentation caused only economic loss. The test for whether a representation was innocent or fraudulent was simply whether the maker of the statement believed in its truth. If he did, it was an innocent misrepresentation, however careless or negligent he may have been in his belief. <15> Under this approach, negligent misrepresentations were treated as innocent misrepresentations and therefore the buyer's remedy was restricted to rescission. <16> Recent decisions, however, are breaking away from this twofold classification and are indicating that the buyer may also be entitled to damages for some negligent misrepre-[- 26 -]sentations. <17> How far the courts will go in this regard, especially in the buyer/seller context, has yet to be finally determined, but there is a strong possibility that in at least some buyer/seller situations damages for negligent misrepresentation are available.

The seller's duties and the buyer's rights and remedies hinge, therefore, on whether a particular representation is classified as a term of the contract or as a mere representation. As stated earlier, this classification is supposed to depend on the intention of the parties, which, however, in many cases is not clear and in others is probably nonexistent. The courts have therefore had to devise certain subsidiary guidelines to aid them in their proper classification. For example, one test is the point of time at which the representation was made. Statements made at the time of the contract or shortly before have a much greater chance of being held to be terms than do statements that were made much earlier in time. Another test is whether the contract was subsequently put in writing and, if so, whether the oral representation was included in the written document. Yet another guideline is whether the statement concerns something that the seller was more likely to know about than the buyer. Lord Denning has formulated [- 27 -] yet another test and that is whether the seller in making a representation had reasonable grounds to believe his statement was true, that is, whether he was guilty or innocent of any fault. It must be stated, however, that none of these tests is conclusive. <18>

(b) Reform in Other Jurisdictions

The law relating to misrepresentations has been the subject of criticism and reform in many jurisdictions. Although the reforms that have been suggested or adopted differ widely, there appear to be two basic approaches to the problems. The first is to subject the seller to greater responsibility and provide the buyer greater protection through changes in the law relating to mere representations. The second is to subject the seller to greater responsibility and provide the buyer greater protection through changes in the law relating to terms. The first approach has been used in England and in South Australia, while the second approach has been used in the United States and Canada.

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(i) England

In 1962 the Law Reform Committee issued a Report on Innocent Misrepresentation <19> which recommended, inter alia, that some of the bars to the remedy of rescission for "mere representations" should be removed and that the remedy of damages should be available for careless misrepresentations.

With respect to rescission, the Report recommended that mere execution or performance of a contract for the sale of goods should not be a bar to rescission. <20> They also recommended that the court should have discretion, in cases where the remedy of rescission would be available, to award damages instead, if the court was satisfied that damages would adequately compensate the plaintiff, having regard to the nature of the representation and the fact that the injury was small compared with what rescission would involve. <21>

The Report also made recommendations concerning the loss of the right to reject the goods for breach of a term of the contract, which has a corresponding effect on the [- 29 -] right to rescind for a mere representation, but we shall discuss this question in detail later on. <22>

With respect to damages, the Report recommended that the person who makes a misrepresentation should be liable for damages suffered in reliance on the representation unless he proves that up to the time the contract was made he believed the representation to be true and had reasonable grounds for his belief. <23> This recommendation was made before the recent common law developments imposing a liability for negligent misrepresentations, and differs from the common law developments in at least two important respects. First, unlike the common law, it does not require any "special relationship" between the parties and, second, it places the burden of proof on the person making the misrepresentation to show that he was not negligent.

These recommendations were adopted in the Misrepresentation Act, 1967. <24>

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(ii) Australia

The Report on Fair Consumer Credit Laws by a Committee of the Law Council of Australia <25> had little to say concerning misrepresentations. The Committee did state that damages should not be available for mere innocent representations, but that rescission should be available for them within a reasonable time after delivery of the goods. They recommended that the common law rules should determine liability for negligent representations. <26>

In 1972, South Australia enacted the Misrepresentation Act, 1971-72, <27> which contains provisions similar to those found in the English Misrepresentation Act, 1967.

(iii) New Zealand

In 1967 the Contracts and Commercial Law Reform Committee of the New Zealand Law Revision Commission published a Report entitled Misrepresentation and Breach of Contract. <28> The Report is highly critical of both the English Report and the English legislation. <29> It recom-[- 31 -]mends that a party who is induced to enter into a contract by misrepresentation of another party should be entitled to damages from the other party as if the representation had been a term of the contract, regardless of whether the representation is a term or whether it was made innocently, negligently, or fraudulently. <30> The Report also recommends that all of the other remedies (and in particular rescission) should also be the same for both terms and representations. <31>

No action had been taken on the Report as of September, 1973.

(iv) The United States

With respect to representations of fact, even the common law of some American jurisdictions did not adopt the intention test or the distinction between "mere representations" and terms. As long as the seller made an affirmation of fact, as distinguished from opinion, the tendency of which would be to induce a sale and which did in fact induce it, many American courts were willing to find a term, without inquiry into any question of whether the seller intended to undertake contractual responsibility for the statement. <32>

[- 32 -] Williston, the prominent professor and author, was particularly critical of the intention test. <33> And since he was the draftsman of the Uniform Sales Act, it is not surprising to find that the Uniform Sales Act did not adopt the intention test either. Instead, section 12 provided as follows:

Any affirmation of fact or any promise by the seller relating to the goods is an express warranty if the natural tendency of such affirmation or promise is to induce the buyer to purchase the goods, and if the buyer purchases the goods relying thereon. No affirmation of the value of the goods, nor any statement purporting to be a statement of the seller's opinion only shall be construed as a warranty.

The Uniform Sales Act was enacted in thirty-seven American jurisdictions, but has now been replaced by the Uniform Commercial Code.

The Uniform Commercial Code, <34> which is in force in every American jurisdiction except one, <35> does not adopt the intention test either. It provides: [- 33 -]

§2-313. (1) Express warranties by the seller are created as follows:

(a) Any affirmation of fact or promise made by the seller to the buyer which relates to the goods and becomes part of the basis of the bargain creates an express warranty that the goods shall conform to the affirmation or promise.

(b) Any description of the goods which is made part of the basis of the bargain creates an express warranty that the goods shall conform to the description.

(c) Any sample or model which is made part of the basis of the bargain creates an express warranty that the whole of the goods shall conform to the sample or model.

(2) It is not necessary to the creation of an express warranty that the seller use formal words such as "warrant" or "guarantee" or that he have a specific intention to make a warranty, but an affirmation merely of the value of the goods or a statement purporting to be merely the seller's opinion or commendation of the goods does not create a warranty.

It will be noted that while the Uniform Sales Act used "reliance" as a test, the Uniform Commercial Code uses "part of the basis of the bargain" as a test. However, it is not clear what changes, if any, have been brought about by this new formulation. The Official Comments to the section indicate that there is no need for the buyer to show particular [- 34 -] reliance on a statement. <36> Instead, there is a presumption of fact that any affirmation of fact is a part of the basis of the bargain, <37> and it is up to the seller to show the contrary. <38>

(v) Canada

In Canada there are two Provinces, Manitoba and Quebec, that have provisions in their consumer protection legislation making certain representations express terms, and two more Provinces, Ontario and Saskatchewan, that are considering this question.

a. Manitoba

The Consumer Protection Act <39> of Manitoba has the following provision:

58. (8) Every oral or written statement made by a seller, or by a person on behalf of a seller regarding the quality, condition, quantity, performance of efficacy of goods or services that is

(a) contained in an advertisement; or

(b) made to a buyer;

shall be deemed to be an express warranty respecting those goods or services.

[- 35 -] It will be noted that this provision makes certain representations terms of the contract without inquiry into the intention of the parties to the contract. Furthermore, there is no requirement that the buyer rely on the statement. Indeed, there is no requirement that the buyer even know that the statement was made, for the seller may have made the statement in advertising that was not seen by the buyer until some time after he entered into the contract.

b. Quebec

The Consumer Protection Act <40> of Quebec also contains provisions that impose obligations on a seller who makes statements in advertising. They are as follows: <41>

60. Any goods furnished by a merchant must comply with the description of them given in the contracts and in catalogues, circulars or other means of advertising.

62. Every warranty in a merchant's advertising respecting goods shall be deemed to form part of the contract of sale respecting such goods.

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c. Ontario

The Ontario Law Reform Commission Report on Consumer Guarantees and Warranties in the Sale of Goods <42> expresses clear dissatisfaction with the present law. The Commission was of the opinion that the intention test, and the resulting twofold classification of representations as terms or mere representations, is most difficult to apply in practice and that many judges, while paying lip service to it, seem to decide a case simply according to what they think would be a fair and reasonable result. The Report recommends that the distinction between terms and mere representations should be abolished in consumer transactions and that the test found in the American Uniform Sales Act should be substituted in its place. That is:

Any affirmation of fact or any promise by the seller relating to the goods is an express warranty if the natural tendency of such affirmation or promise is to induce the buyer to purchase the goods, and if the buyer purchases the goods relying thereon.

The Report prefers this test to the more recent formulation of the Uniform Commercial Code, which was thought to be more obscure. <43>

[- 37 -] The Report does differ in one material respect from both American provisions in that it does not support the exclusion of language of commendation (for example, statements as to the value of the goods) from the governing test. The reason for this is the importance the Report attaches to modern advertising techniques in influencing the consumer. <44>

The Report has not yet been implemented by the Ontario Government. However, it is under active consideration. The Green Paper on Consumer Product Warranties in Ontario, issued by the Ontario Ministry of Consumer and Commercial Relations in August 1973, states that the Ministry has not yet decided what the test should be and invites comments and advice on the question. <45>

d. Saskatchewan

The Department of Consumer Affairs is presently engaged in a study of the whole question of consumer guarantees and warranties.

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e. Federal Legislation

Before turning to our own views and recommendations, we think it is most appropriate to draw attention to certain provisions of the Federal Combines Investigation Act, <46> which we believe are relevant to the present problem.

The present Combines Investigation Act does not give private rights to the individual consumer in respect of representations made by a seller, but it does impose certain duties on a seller that are enforceable by public prosecution. Of particular interest to us here is that the Act makes guilty of an indictable offence, and liable to imprisonment for five years, a seller who makes an untrue statement of fact in advertising. The seller is under a strict duty to be accurate. <47> It is no defence for him to prove that he was honestly mistaken and that he took the utmost care in checking his facts before publication.

In November 1973 the Federal Government introduced a Bill in the House of Commons that would amend the Combines Investigation Act. <48> The scope of the prohibition against [- 39 -] misrepresentation would be broadened to include misrepresentations to the public by any means whatever. <49> Only advertising is caught at present. Furthermore, representations "made in the course of in-store, door-to-door or telephone selling to persons as ultimate users" would be deemed to be made to the public. <50> At the same time, the penalty for making a misrepresentation would be reduced. The person guilty of a misrepresentation could be proceeded against either by indictment or by summary conviction. In the case of conviction on indictment, he would be liable to imprisonment for two years. On summary conviction, he would be liable to a fine of up to two thousand dollars or to imprisonment for one year, or to both. <51>

The Bill would also give a civil remedy to the consumer who suffers damage by reason of a misrepresentation to the public. It would entitle him to recover "an amount equal to the loss or damage proved to have been suffered by him, together with any additional amount that the court may allow not exceeding the full cost to him of any investigation in connection with the matter and of pro[- 40 -]ceedings under this section". <52> The Bill would also allow, in the private action by the consumer against the seller, evidence to be used of any prior proceedings in which the seller was convicted of the offence of making a misrepresentation, and this evidence would be treated as proof of the misrepresentation in the absence of any evidence to the contrary. <53> The time limit for bringing civil actions under this provision would be two years. <54>

(c) Our Views and Recommendations

We turn now to our own views on whether reform should be made in the law relating to misrepresentations and, if so, the direction the reform should take. It should be apparent from our discussion of developments elsewhere that if reform is to be made, there is a wide selection of possible courses of action from which to choose.

Obviously, the present law concerning representations of fact is complex, and raises a number of issues. The duties of the seller and the rights and remedies of the buyer for breach of these duties can be stated separately, but they must be combined if one is to grasp the final result.

[- 41 -] The law could impose at least three different duties upon a seller who makes a representation of fact. First, it could impose a duty simply to be honest. Or, more onerous, it could impose a duty to be careful. Or, most onerous, it could impose a duty to be accurate.

The reason for imposing a duty, of course, is to protect the buyer from damage. That damage may take many different forms. <55> First, a misrepresentation may induce the buyer to pay more for the goods than they are worth, in which case the seller will have derived a benefit from his misrepresentation at the buyer's expense. The buyer's loss is the seller's gain. The buyer's interest in recovering this benefit is called the restitution interest. Second, the misrepresentation may induce the buyer to do something else to his detriment which does not result in a corresponding benefit to the seller. Here, unlike the first case, the buyer's loss is not the seller's gain. The buyer's interest in being put back in the position he was in before the misrepresentation was made is called the reliance interest. Third, the misrepresentation may simply disappoint the expectation that was [- 42 -] aroused in the buyer when the representation was made. His interest in being placed in the position he would have been in had the statement been true is called the expectation interest.

These three interests, restitution, reliance, and expectation, overlap to some extent. For example, the reliance interest would include the restitution interest, and the expectation interest might in a particular case include both the restitution and reliance interests. But they also clearly differ.

It should also be noted that the damage suffered by the buyer need not be an economic one. Misrepresentations may also result in damage to his person or his property.

If the representation is held to be a term of the contract, the seller is burdened with the most strict duty, accuracy, and the buyer is extended the greatest protection, protection for his expectation interest. <56>

[- 43 -] If, however, the representation is held not to be a term of the contract but rather a "mere representation," the situation is much more complicated, both in terms of the duties imposed on the seller and the interests of the buyer that receive protection. The seller is always required to be honest, is sometimes required to be careful, and is sometimes required to be accurate. The buyer sometimes receives protection for his restitution interest, sometimes receives protection for his reliance interest, and never receives protection for his expectation interest. Specifically, for a dishonest representation the law protects the buyer's restitution and reliance interests; in those cases where the law requires the seller to be careful it also protects the buyer's restitution and reliance interests; and in those cases where the law requires the seller to be accurate it protects only the buyer's restitution interest. Perhaps the latter point needs elaboration, since it is not traditional to speak of imposing a duty of accuracy in the case of a mere innocent representation. However, the effect of rescission is to protect the buyer's restitution interest, and since rescission is available for a mere innocent representation, it follows that in those cases where rescission is available the buyer's restitution interest is protected. However, [- 44 -] since rescission is not always available, it is necessary to say that it is only sometimes that the law imposes a duty of accuracy.

We believe that the present law is unnecessarily uncertain, complex, and artificial, at least as far as consumer transactions are concerned, and that it fails to give adequate protection to the consumer.

In our view the very least that should be done is to reform the law along the lines of the English Misrepresentation Act, 1967. <57> This would increase consumer protection through changes in the law relating to "mere representations," without changing the distinction between "mere representations" and representations that are terms of the contract. Under this approach, the court would still make the determination whether the parties intended the representation to be a term of the contract. If the court held it to be a term, the seller would be strictly liable for its accuracy, and it would be irrelevant whether the seller was innocent, negligent, or fraudulent, in making the representation. The buyer would be entitled to be placed in the same position he would have been in had the representation been true, that is, he would receive protection for his expectation interest. [- 45 -] If, however, the court decided that it was not intended that the representation be a term of the contract, but only a mere representation, the seller would not be strictly liable for the buyer's expectation interest. But, since rescission would be available in more cases than it is under the present law, the seller would be strictly liable for the buyer's restitution interest in more cases than he is at present. And the seller would always be required to be both honest and careful, and for breach of either of these duties the buyer would receive protection for both his restitution and reliance interests.

The English reforms would encourage more care on the part of sellers in making representations, and would give greater protection to consumers by removing the uncertainty concerning the duty to be careful in the present law and by putting the burden of proof on the seller to show that he took reasonable care before making the representation. Even so, it may be questioned whether, if reform only of the law relating to mere representations is to be made, the English reforms go far enough. We believe that the buyer's restitution interest should be protected in all cases of innocent misrepresentation, rather than limiting it to the case where rescission [- 46 -] happens to be available. <58> And we believe that in cases of fraudulent representations the buyer's expectation interest should be protected, if nothing else as a punitive measure to discourage fraudulent representations.

If reform only of the law relating to mere representations is to be made, then, we would recommend that the seller's liability for mere representations should be as follows. The seller should be liable [- 47 -]

(a) for the buyer's restitution interest, if the representation was purely innocent;

(b) for the buyer's reliance interest, if the representation was negligent, the burden of proof to be on the seller to show that he took reasonable care in making the representation;

(c) for the buyer's expectation interest, if the representation was fraudulent, the burden of proof to be on the seller to show that it was not fraudulent.

As we stated at the outset, we regard these as the minimum reforms that should be made. In our opinion, however, the reforms should go further, at least as far as consumer transactions are concerned. We favour the more radical approach adopted in the United States and recommended by the Ontario Report, whereby all operative representations would be treated as terms of the contract. <59> Under this [- 48 -] approach, a seller who makes a representation of fact to induce a sale, and which does in fact induce it, would be strictly liable to the consumer for the accuracy of the representation; if the representation was inaccurate, the consumer would be entitled to receive protection for his expectation interest.

Our reasoning is as follows. A seller makes representations to influence the consumer's decision on whether to buy and, if so, at the price requested. The consumer, if he does rely on the representation, pays his price on the basis that the representation is true. For example, other things being equal, a seller can get more money for a 1973 model car than he can get for a 1972 model car. If the seller states that a particular car is a 1973 model, when in fact it is a 1972 model, and the consumer relies on this statement, the consumer will pay more than he would if the true facts were known. The fact that the seller honestly believed that he was speaking the truth, and that he took care in making his statement, does not change one iota the fact that although the seller set his price on the basis of the representation, and the buyer paid his price on the basis of the representation, the buyer does not receive what he paid the seller for, a 1973 model. We believe the business advantages derived from representations should be accompanied with full legal responsibility for their accuracy.

[- 49 -] The strict liability approach is also in line with the Federal Combines Investigation Act, although at present that Act applies only to advertising and does not in any event give any private rights to the consumer. The proposed amendments to that Act would extend its application to all representations to the public and would for the first time give a right to the consumer to recover damages suffered on account of the representation. <60>

If the amendments are enacted, and if it is within the legislative competence of Parliament to provide civil remedies for representations, about which there is some doubt, <61> it would appear that the consumer would receive protection for his restitution and reliance interests, but not his expectation interest.

[- 50 -] We favour protection of the expectation interest of the buyer. Since the buyer paid his price on the basis of the truth of the representation, why should he not be entitled to be placed in the position he would have been in if the representation had been true? Since he paid for the bargain, why should he not get the benefit of the bargain? Because of the overlap between the various interests, in many cases it would not make much difference in terms of actual recovery which interest of the buyer receives protection. But even in those cases where the recovery would be the same, because the buyer in fact suffers damage only to his restitution interest or to his reliance interest, the expectation interest approach tends to minimize the problem of proof of damage. <62> For example, if a car seller were to state that the car radio is working properly and it is discovered later that it does not work properly, it might be much easier for the buyer to prove what it would cost to fix the radio than to prove the difference between what he paid for the car and what the car is worth in its present state.

[- 51 -] We start, then, with the premise that it is reasonable that a seller who makes a representation to induce a sale and who is successful in his efforts should be strictly liable for the buyer's expectation interest. And although we are prepared to admit that there may be some cases where this is not appropriate, we do not believe that there would be enough such cases in consumer transactions to outweigh the disadvantages of retaining the distinction between terms and mere representations, even if the minimum reforms we suggested in the law relating to mere representations were adopted. These disadvantages are the difficulty in drawing the distinction between terms and mere representations, the resulting uncertainty, the artificiality, and the almost overwhelming complexity.

However, if it were decided that the distinction between terms and mere representations should be retained in consumer transactions, we would recommend that in addition to the minimum reforms that we suggested above in the law relating to mere representations, <63> the following additional reforms should be made: [- 52 -]

1. All representations of fact made by the seller in his advertising should be terms.

2. All other representations of fact should prima facie be terms, and the burden should be on the seller to prove that they are not terms.

For the reasons already given, however, we prefer to make all operative representations terms of the contract. We recommend that any representation of fact that the seller makes in relation to the goods should be a term of the contract unless the circumstances show that the buyer does not rely, or that it is unreasonable for him to rely, on the seller's representation. Although our recommendation is not identical to any of the formulations used by the Uniform Sales Act, the Uniform Commercial Code, or the Ontario Law Reform Commission Report, it is similar to all of them. We prefer our formulation because we believe it places a slightly greater burden of proof on the seller, and because it is more in line with the recommendations we make later in this Report concerning the implied term as to fitness for purpose <64> and the recommendations we make concerning contracting out of the statutory terms. <65> [- 53 -]

We further recommend that this test should also be used in the case of promises made by the seller.

5. OPINIONS

We also believe that, if our recommendations are to work effectively, another step should be taken and that is in the area of opinions given by the seller. We have cast our recommendations for statutory express terms in terms of promises and representations of fact, so that for the most part opinions by the seller would not be statutory terms. The present law largely excludes opinion from terms as well.

An unscrupulous seller might attempt to avoid our proposals by stating in the form of an opinion what he hopes the consumer will take as a fact. To prevent this possible evasion, we recommend that the law should apply the same test to opinions given by the seller as that recommended for promises and representations of fact made by the seller. If the seller states his opinion that the goods have certain qualities (or whatever), then it should be a statutory term of the contract that the goods will have these qualities, unless the circumstances show that the buyer does not rely, or that it is unreasonable for him [- 54 -] to rely, on the seller's opinion. This proposal, while preventing the evasion of the intent of our recommendations through the form in which a statement is made, would not in our opinion operate unfairly against sellers. There still would be room under this test to make a distinction between genuine opinion, which is understood by the parties as not giving rise to responsibility, and that which is taken as reliable: promises, representations, or opinions in form only, meant to induce reliance.

6. ADVERTISING

During the course of our review of the reform legislation in the representation of fact area, we pointed out that the Manitoba consumer protection legislation made the seller's advertising an express term of the contract, apparently without any requirement that the consumer rely on the advertising. <66> Quebec's consumer legislation contains a similar provision. <67> We also favour such a provision.

If the seller has enough confidence in his claims to make them in advertising to the general public, we think it is reasonable to require him to stand behind his claims [- 55 -] for all purchasers from him of the advertised product. There is also a practical reason for a special rule in the advertising area, and this is that our general reliance test may cause difficulty to the consumer here. For example, a consumer may not see or rely on the advertising himself, but may rely on the advice of a friend who himself relied on the advertising in forming his opinion.

We accordingly recommend that any promise or representation of fact that the seller makes in relation to the goods in his advertising should be deemed to be an express term of the contract.

7. LABELS, ETC.

The final question in this part of the Report concerns the seller's responsibility for statements or promises made on labels or other printing on the goods or their container, or in tags or other signs or documents attached to or accompanying or in close proximity to the goods. Unlike the cases that we have considered so far, these statements may not originate from the seller or his salesman, but come from someone else, most likely the manufacturer or distributor. There is surprisingly little authority on the seller's responsibility for such statements.

[- 56 -] In the United States, the Uniform Commercial Code appears to make the seller responsible for such statements, <68> and in our view this is a sound approach. In many cases, especially the self-service store, statements on labels are all that the consumer has to go on.

We accordingly recommend that the seller should be deemed to make any promise or representation of fact that is contained in labels or other printing on the goods or their container, or in tags or other signs or documents attached to or accompanying or in close proximity to the goods, and that these promises or representations of fact should be deemed to be an express term of the contract.

8. RECOMMENDATIONS

We recommend that:

Parol Evidence Rule
1. The parol evidence rule, which in many cases automatically restricts the express terms of a contract to what is contained in the written contract, should be abolished in consumer transactions.

[- 57 -] "No Authority" Clauses
2. Clauses in written contracts that deny authority for the salesman to vary the terms of the written contract should be denied effect in consumer transactions. Instead, the normal agency rules should govern, whereby the seller would be liable for everything within the salesman's usual or apparent authority.

Promises and Representations of Fact
3. The consumer protection legislation should make any promise or representation of fact that the seller makes in relation to the goods an express term of the contract, unless the circumstances show that the buyer does not rely, or that it is unreasonable for him to rely, on the seller's promise or representation.

Opinions
4. The consumer protection legislation should provide that if the seller states his opinion that the goods will meet [- 58 -] certain specifications, it is an express term of the contract that the goods will meet these specifications, unless the circumstances show that the buyer does not rely, or that it is unreasonable for him to rely, on the seller's opinion.

Advertising
5. The consumer protection legislation should make any promise or representation of fact that the seller makes in relation to the goods in his advertising an express term of the contract.

Labels, etc.
6. The consumer protection legislation should deem the seller to make any promise or representation of fact that is contained in labels or other printing on the goods or their container, or in tags or other signs or documents attached to or accompanying or in close proximity to the goods, and such a promise or representation should be an express term of the contract.

Footnotes

<1> See, e.g., Saint John Tug Boat Co. Ltd., v. Irving Refinery Ltd., [1964] S.C.R. 614 (Can. Sup. Ct.).

<2> See, e.g., Le Roy Plough Co. v. J. Clark & Son, Limited (1921), 49 N.B.R. 285, 65 D.L.R. 370 (N.B.C.A.).

<3> However, there is one judge, Lord Denning, who does openly support a general fairness and reasonableness test. See Gillespie Brothers & Co. Ltd. v. Roy Bowles Transport Ltd. Rennie Hogg Ltd. (Third Party), [1972] 3 W.L.R. 1003, at page 1014 (Eng. C.A.) .

<4> See Chapter IV, infra.

<5> Goss v. Lord Nugent (1833), 110 E.R. 713, at page 716 (K.B ), per Denman, C.J.

<6> See, e.g., Berlin Machine Works, Limited v. Randolph & Baker, Limited (1917), 45 N.B.R. 201 (N.B.C.A. ).

<7> Hawrish v. Bank of Montreal (1969), 2 D.L.R. (3d) 600 (Can. Sup. Ct.).

<8> See Francis v. Trans-Canada Trailer Sales Ltd. (l969), 6 D.L.R. (3d) 705 (Sask. C.A.); Mendelssohn v. Normand Ltd., [1969] 3 W.L.R. 139 (Eng. C.A.).

<9> Report on Consumer Warranties and Guarantees in the Sale of Goods (1972), at page 44.

<10> Report on Consumer Warranties and Guarantees in the Sale of Goods (1972), at page 44.

<11> See, e.g., Frank T. Ross & Sons (1962) Limited v. Con-O-Lab Limited (1971), 3 N.B.R. (2d) 647 N.B.C.A.).

<12> See, e.g., Leaf v. International Galleries, [1950] 2 K.B. 86 (Eng. C.A.).

<13> Compare Redican v. Nesbitt, [1924] S.C.R. 135 (Can. Sup Ct.), with O'Flaherty v. McKinlay, [1953] 2 D.L.R. 514 (Nfld. C.A.). For a New Brunswick case on this see Frank T. Ross & Sons (1962) Limited v. Con-O-Lab Limited (1971), 3 N.B.R. (2d) 647 (N.B.C.A.)

<14> R.S.N.B. 1952, c. l99. The circumstances in which the buyer will lose his right to reject the goods for breach of conditions under the Sale of Goods Act will be discussed later in this Report. See Chapter III, infra.

<15> Derry v. Peek (1889), 14 App. Cas. 337 (H.L.).

<16> Heilbut, Symons & Co. v. Buckleton, [1913] A.C. 30 (H.L.).

<17> The foundation case is Hedley Byrne & Co. Ltd. v. Heller & Partners Ltd., [1964] A.C. 465 (H.L.).

<18> See the discussion in Cheshire and Fifoot, The Law of Contract (8th ed., 1972), at pages 109-115.

<19> Tenth Report (London, 1962, Cmnd. 1782).

<20> Ibid., para. 9.

<21> Ibid., para. 12.

<22> See Chapter III, infra.

<23> Para. 18.

<24> 15 & 16 Eliz. II, c.7 (Imp.). For an excellent critique on this legislation, see Atiyah and Treitel, Misrepresentation Act 1967 (1967), 30 Modern Law Rev. 369.

<25> Report on Fair Consumer Credit Laws to the Attorney General for the State of Victoria by a Committee of the Law Council of Australia (Melbourne, 1972).

<26> Ibid., para. 5.3.2.

<27> S.S.A. 1972, No. 46.

<28> (Wellington, New Zealand, 1967).

<29> Ibid., para. 9.

<30> Ibid., para. 13.3.

<31> Ibid., para. 15.

<32> See Williston on Sales (Rev. Ed., 1948), sections 198-201.

<33> See Williston, Representation and Warranty in Sales. - Heilbut v. Buckleton (1913), 27 Harvard L. Rev. 1.

<34> All references are to the 1972 Official Text with Comments, published by The American Law Institute and the National Conference of Commissioners on Uniform State Laws.

<35> The one exception is Louisiana and it, of course, is a civil law jurisdiction.

<36> S.2-313, Comment 3.

<37> Ibid., Comment 6.

<38> Ibid., Comments 3 and 8.

<39> R.S.M. 1970, c. C200, as am.

<40> S.Q. 1971, c.74.

<41> Sections 60 and 62 were proclaimed in force September 30, 1971.

<42> 1972.

<43> Ibid., at page 29.

<44> Ibid.

<45> At page 5. The Speech from the Throne at the recent opening of the Ontario Legislature forecast new legislation dealing with consumer goods guarantees: Canadian Sales and Credit Law Guide Reports (Report Number 80, March 25, 1974), at p.1.

<46> R.S.C. 1970, c. C-23, ss. 36, 37.

<47> See, e.g., R. v. J. Clark & Son Ltd. (1972), 5 N.B.R. (2d) 394 (N.B.C.A.).

<48> Bill C-227, introduced in the House of Commons by the Minister of Consumer and Corporate Affairs on November 5, 1973. The Bill was reintroduced as Bill C-7 on March 11, 1974.

<49> Section 36(1).

<50> Section 36(2)(d).

<51> Section 36(6).

<52> Section 31.1(1).

<53> Section 31.1(2).

<54> Section 31.1(4).

<55> See Fuller and Perdue, The Reliance Interest in Contract Damages (1936), 46 Yale Law J. 52.

<56> The buyer does not receive perfect protection of his expectation interest, however. The two most important limitations are: (1) the losses must have been within the "reasonable contemplation" of the parties at the time of the making of the contract, and (2) the buyer is under a duty to take reasonable steps to mitigate his losses. For a fuller discussion of remedies, see Chapter III, infra.

<57> See text, supra, at pages 28-29.

<58> We note that the tentative draft of the American Restatement (Second) of Torts contains a provision to protect the buyer's restitution interest in all cases of innocent misrepresentations. The last version was as follows:

§524A.
MISREPRESENTATION IN SALE, RENTAL OR EXCHANGE TRANSACTIONS.

(1) One who, in a sale, rental or exchange transaction with another makes a misrepresentation of a material fact for the purpose of inducing the other to act or to refrain from action in reliance upon it, is subject to liability to the other for the harm caused by his justifiable reliance upon the misrepresentation, even though it is made without knowledge of its falsity or negligence.

(2) If such a misrepresentation is made without knowledge of its falsity or negligence the damages recoverable for it are limited to the difference between the value of what the other has parted with and the value of what he has received in the transaction.

The final version (and its numbering) has not been decided upon.

<59> See text, supra, at pages 31-34, 36-37.

<60> See text, supra, at pages 38-40.

<61> The explanatory notes to the Bill make the following comment on this problem: "While the constitutionality of new section 31.1 may be challenged as relating to property and civil rights or matters of a local or private nature which, under section 92 of the B.N.A. Act, are within provincial, rather than federal, jurisdiction, it is nevertheless hoped that the section will be upheld as a matter ancillary to the criminal law, or relating to trade and commerce, and therefore within federal jurisdiction under section 91 of that Act." Proposals for a New Competition Policy for Canada, First Stage 1973, Consumer and Corporate Affairs, November 1973, at page 67.

<62> There will, however, be some cases where the expectation interest is more difficult to prove: See Fuller and Perdue, The Reliance Interest in Contract Damages (1936), 46 Yale Law J. 52, 373.

<63> See text, supra, at pages 46-47.

<64> See text, infra, at pages 95-96.

<65> See Chapter IV, infra.

<66> See text, supra, at pages 34-35.

<67> See text, supra, at page 35.

<68> §2-314 (2). Goods to be merchantable must be at least such as

(f) conform to the promises or affirmations of fact made on the container or label if any.