Misleading and deceptive conduct during contract performance

In a Techlaw column in February we talked about actions under the Fair Trading Act 1986 for misleading and deceptive conduct that occurred before entering into a contract. However, misleading and deceptive conduct claims can also arise during in-contract performance.

In a Techlaw column in February we talked about actions under the Fair Trading Act 1986 for misleading and deceptive conduct that occurred before entering into a contract (see Who's liable when complex projects go wrong?). However, misleading and deceptive conduct claims can also arise during in-contract performance.

A recent New Zealand High Court case involving incorrect turnover representations resulted in a criminal conviction for misleading and deceptive conduct.

The defendant, Gourmet Burger Co, misrepresented projections as to future turnover of its franchise business to a prospective franchisee. The prospective franchisee relied on these representations and entered into the franchise. The franchise business subsequently failed and was put into liquidation.

The defendant’s conduct was found to be capable of being misleading despite having a disclaimer clause in the franchise agreement. The court found that the disclaimer clause was “overwhelmed by subsequent oral assurances”.

This case is also relevant to complex computer projects such as large-scale implementation projects. Such projects involve long-term relationships and highly technical issues. The people involved in the project on both the customer and supplier side have constant contact on a day to day basis.

Strong personal relationships can be built and the role of each project member as “supplier” and “customer” can become blurred as the common goal, successful completion of the project, is focused on. This means that the care that is taken during the pre-contract phase of a project may not be taken when making representations.

During such an ongoing contractual relationship, there is a risk that statements may be made that are characterised, after the event, as a “misleading” or “deceptive” representation.

Fair Trading Act claims for misleading or deceptive conduct are one of the most common sources of non-contractual liability. The risk, as shown in the Gourmet Burger case, is that a watertight contract will not necessarily relieve you from liability under the Fair Trading Act. For example, liability under the Fair Trading Act will not be limited by a limitation clause in a contract. Fair Trading Act claims do not have to be dealt with in accordance with dispute resolution clauses in a contract and a time limit in the contract for bringing a claim will not relieve you from an action under the act. In addition, it is recognised that contracts of a “relational nature” imply special obligations of good faith in contract performance.

Contracts are relational in nature when the parties “enter into continuing, highly interactive, contractual arrangements” which involve “working ongoing and often relatively open-ended relationship set up for the parties mutual benefit” (from the Dymocks case, High Court 1999).

Such a relationship may impose an obligation on the supplier to disclose certain information to the customer. In other words, there may be a positive obligation to ensure that the customer is informed correctly, not just a prohibition on misleading the customer.

There are, however, methods that can be put in place to reduce the risk of breaching obligations under the Fair Trading Act.

For example, procedures for formalising representations may be implemented. This may include defining who is authorised to make representations and the means by which representations can be made.

However, the key issue is educating your project staff. Your staff must be aware of reporting structures that control and monitor the project, the procedures that ensure representations are authorised and of the risks inherent in identifying with the customer too much.

All project staff need to bear in mind at all times the fact that, at the end of the day, the customer and supplier have different interests. If not, once the immediate focus of go live has passed (either by being achieved or, worse, through cancellation of the project) and the attention turns to shifting the costs, careless statements can come back and bite.

Parkinson is a partner and Walton is a solicitor in Clendon Feeney’s technology law team. This article, together with further background comments and links to other websites, can be downloaded from www.clendons.co.nz. Send email to Averill Parkinson. Send letters for publication in Computerworld to Computerworld Letters.

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