Misrepresentation in Contract Law

One party in a contract may make an untrue statement of a material fact that influences the other party’s decision. This is known as misrepresentation. If the misrepresentation is discovered, the contract can be invalidated, and the negatively affected party can seek damages. In a contract dispute involving misrepresentation, the party who made the false statement becomes the defendant, while the aggrieved party is the plaintiff.

Misrepresentation holds significant importance in contract law, particularly in business transactions that involve large sums of money and occur frequently. False statements about the value or risk associated with an agreement can result in substantial financial losses for both businesses and individuals and heighten the risks of collaborative business ventures. Therefore, ensuring fairness and reducing the risks associated with agreements between individuals and businesses makes misrepresentation contract law indispensable.

What is Misrepresentation in Contract Law

A representation refers to a statement that influences the formation of a contract but is not considered a contractual term.

Misrepresentation in Contract Law occurs when one party provides false or inaccurate information to the other party with no bad intention leading them to enter the contract. Suppose an individual enters into a contract based on misrepresentation in Indian Contract Act and suffers losses. As a result, they have the right to either rescind the contract or seek compensation for damages.

Definition of Misrepresentation in Indian Contract Act

Section 18 of the Indian Contract Act of 1872 addresses the concept of misrepresentation. It defines misrepresentation as a statement made before the completion of a contract. Section 19 of the Act states that misrepresentation can render a contract voidable.

Statements made before the formation of a contract can fall into two categories:

• Statements that become a part of the contract.
• Statements that are not part of the contract are considered representations.

However, the presence of misrepresentation does not automatically make a contract voidable. There are certain conditions:

• The contract is still valid if ordinary diligence could have discovered the statement.
• If the statement does not influence the consent of the party to whom it was made, the contract remains unaffected.

An example of a misrepresentation case is Derry v. Peek. In this case, the defendant, who owned a tramways company, issued a notice claiming they had received permission for steam trams when the permission was still pending. The defendant genuinely believed that the approval was a mere formality. The plaintiff purchased shares in the company based on this statement, but the permission was ultimately not granted, leading to financial harm. The court ruled that the defendant company was not liable as they genuinely believed in the accuracy of the statement.

It is important to note that the burden of proof for establishing misrepresentation under Contract Law lies with the party alleging it.

Essentials of Misrepresentation

For a misrepresentation to occur, the following elements must be present:

• The false representation of a fact: There must be a statement or assertion that is untrue or misleading.
• Causal link to consent: The false representation must be a material factor that influences the party’s consent.
• Intention to induce: The statement should be made to deceive or induce the other party into entering the contract.
• Timing: The statement must be made before the contract is finalised or concluded.
• Absence of deception: The statement should not be made to deceive the other party intentionally.

In the case of Rickview Construction Co. v. Raspa, it was determined that when a contract is formed based on misrepresentation, the disadvantaged party not only has the right to void the contract but can also seek damages through legal action.

Types of Misrepresentation in Contract Law

Three types of misrepresentation can occur in a contract:

Fraudulent misrepresentation

This misrepresentation happens when a false statement is made, and the party (let’s say X) knows it is false or is reckless about its accuracy. A genuine belief in its truth is necessary to make it fraudulent. If party A honestly believes the statement to be true, it cannot be considered fraudulent misrepresentation. Negligence in making a false statement does not constitute fraud. However, if it can be shown that party A suspected the statement might be false but made no effort to verify its accuracy, that is sufficient. It is not necessary to prove a dishonest motive.

Negligent misrepresentation 

Negligent misrepresentation occurs when a declaration is made by one party to another negligently or without reasonable grounds to believe it is true. There is no requirement to establish fraud. If the innocent party can prove that the statement was false, it is up to the party who made the statement to demonstrate that they had a reasonable belief in its truthfulness. Innocent misrepresentation

Innocent misrepresentation refers to a misrepresentation made without any fault. If party X cannot show they had objective grounds to believe the statement was true, the misrepresentation is categorised as fraudulent or negligent.

In the case of Raymond Woollen Mills Limited v. Income Tax Officer, Centre Circle Xi, Range Bombay and Others, the appellant argued that the Department had made a serious mistake in concluding. The court did not decide whether there was a suppression of evidence, as it was not a matter to be considered at that stage. The court held that it could not strike down the reopening of the case in the given circumstances. The assessee (taxpayer) had the opportunity to contest the understatement of profits. The Revenue obtained the relevant information in a subsequent year’s assessment proceeding. The sufficiency or correctness of the information was not to be considered at that stage.

In the case of Raj Kumar Soni vs. State of U.P. 2007, it was held that the suppression of material facts is against the principles of law. The party guilty of withholding the correct facts should not be entitled to any benefits, as it is considered that such a party does not approach the court with clean hands.

Effects of Misrepresentation

Section 19 of the Indian Contract Act states that when consent to an agreement is obtained through misrepresentation, the aggrieved party can insist on the contract’s performance and avoid or rescind the contract.

In the case of Long v. Lloyd (1958), the defendant sold their lorry to the plaintiff by falsely convincing them that it was in excellent condition. However, they discovered serious defects on the plaintiff’s first journey with the lorry. Despite this, the plaintiff accepted the defendant’s offer to share half the cost of repairs. Unfortunately, the lorry broke down completely on the next journey, and the plaintiff sought to cancel the contract.

However, the court held that the plaintiff had become aware of the misrepresentation under Contract Law during their first drive and had the opportunity to withdraw from the contract. Since the plaintiff chose not to do so, they could not claim damages based on the misrepresentation.

Remedies of Misrepresentation in the Indian Contract Act

The remedies available for misrepresentation in Indian Contract Act, considering that it is a voidable contract entered into unintentionally by a party, are as follows:

Rescission

Rescission refers to the cancellation or termination of the contract. The aggrieved party can seek rescission of the contract and/or claim damages. Rescission aims to restore the parties to their pre-contractual position as much as possible (the status quo ante).

Performance

The aggrieved party can insist that the party who made the misrepresentation under Contract Law fulfils their obligations under the contract in the manner that was originally agreed upon.

It is important to note that the remedies for misrepresentation aim to provide relief to the party negatively impacted by the misrepresentation, allowing them to either cancel the contract or enforce the original terms.

Limitations Available to Remedies

It is possible to include a clause in a contract that limits the available remedies in case of a misrepresentation claim. This clause can specify that the remedies for misrepresentation under Contract Law will be restricted to those available for a breach of contract, thereby excluding the right of the innocent party to rescind or revoke the contract.

By including such a clause, the parties to the contract agree in advance to limit the potential consequences of misrepresentation in Indian Contract Act. This can serve as a form of protection for the party making the representation, as it restricts the remedies the other party can seek in case of misrepresentation. However, it is important to note that the enforceability and validity of such clauses may vary depending on the jurisdiction and the case’s specific circumstances.

Misrepresentation and Fraud under Contract Law

In the case of fraud, the false statement is deliberately made to deceive the other party. The person making the statement knows it is false and intends to mislead the other party. This is a clear act of deception and carries higher culpability.

On the other hand, misrepresentation occurs when a false statement is made, but the person making the statement genuinely believes it to be true. There is no intention to deceive or mislead the other party. The misrepresentation is made in good faith, but it still leads the other party into the contract based on inaccurate information.

To illustrate the difference, consider the examples you provided:

In the case of fraud, X knowingly sells a car with an engine problem and falsely represents it as being in excellent condition. X intends to deceive Y and induce them to purchase the car. This is a clear case of fraud.

In the case of misrepresentation, X genuinely believes that the car is in good condition and makes a statement to that effect. However, unbeknownst to X, the car has an engine problem. X’s statement is made in good faith but needs to be more accurate, leading Y to purchase the car based on false information.

It is essential to differentiate between fraud and misrepresentation because the remedies and legal consequences of each may vary. Fraud typically carries more severe consequences due to the deliberate intent to deceive. At the same time, misrepresentation may still give rise to legal remedies but may be treated differently due to the lack of fraudulent intent.

Here is a table differentiating between mistake and fraud:

Conclusion

Misrepresentation refers to making a false statement of fact that induces the parties consent to enter into a contract. When consent is obtained through misrepresentation, it is not considered freely given. As a result, the contract is considered voidable, meaning that the innocent party can either affirm the contract or rescind it based on the misrepresentation in Indian Contract Act.

Misrepresentation can take the form of positive assertions or statements, but the key requirement is that there must be a false representation of a fact. The statement of misrepresentation is made to deceive or induce the other party into entering the contract. The misrepresentation must be made before the contract is concluded or finalised.