Friday, 3 June 2022

Misrepresentation in Contract


By: Robin Pandey                                                                                                  Date: 27/02/2022

Statements of facts made during preliminary bargaining to induce the other to enter into a contract may be mere representation not intended to be terms of the contract. On the other hand, misleading statements of facts made during preliminary bargaining may be intended to form part of the contract. A false misleading representation made innocently e.g. without an intention o deceive the other party, Is known as misrepresentation

According to Section 18 "misrepresentation" means and includes

(1) The positive assertion, in a manner not warranted by the information 1) of the person making it, of that which is not true, though he believes it 1o be true; 

(2) Any breach of duty which, without an intent to deceive. gains an advantage to the person committing it, or any one claiming under him, by misleading another to his prejudice or to the prejudice. of him, any one claiming under him:

(3) Causing, however innocently, a party to an agreement to make a mistake as to the substance of the thing which is the subject of the agreement.

The main difference between fraud and misrepresentation is that in the case of fraud the person making the suggestion does not believe it to be true and in the case of misrepresentation he believes it to be true though in both cases it is a misstatement of fact which misleads.

Section 18 includes the following three types of misrepresentation.

1) Unwarranted statements

When a person positively asserts i.e. makes an absolute and explicit statement of fact, that a fact is true although he has not received that information from a trustworthy source, but he believes it to be true, this is misrepresentation.

In Mohanlal v. Gungagi Cotton Mills Co, A told R the plaintiff that C would be the director of a company. A had obtained this information not from C direct, but from another person called D. The information was later on found to be untrue. It was held that A was not warranted to make a positive assertion that C would be a director of the company and therefore B was entitled to avoid the contract to take shares. The High Court of Calcutta held that an assertion cannot be said to be "warranted" for his purpose when it is based upon mere hearsay

2. Breach of duty

 Any breach of duty which brings an advantage to the person committing it by misleading the other to his prejudice is a misrepresentation. Section (1)&(2) also applies to a case where a statement is true when it is made but it becomes false later on, and to the knowledge of the maker, before it has been acted upon. For example in Incledon v. Watson, (1862), A while negotiating e $ale of goodwill of a school to B, told him that there were 22 boarders. Ugh the statement was true when it was made, but before the bargain was struck. the number of boarders had fallen to 17, and this fact was known to A. However, he did not inform the fact of the number falling to B. It was held that the breach of duty entitled B to rescind the contract.

3. Inducing mistake about subject-matter 

Causing, however innocently, a party to an agreement, to make a mistake as to the substance of the thing which is the subject of the agreement is misrepresentation as per Section 18(3).

In Johnson v. Crowe, (1874), the defendant agreed to sell and deliver to the plaintiff a boiler at a certain place, the plaintiff having innocently represented to the defendant that there was a practicable road all the way. In fact, there was a suspension bridge on the way and the bridge was not strong enough to bear the weight of the boiler.

Effect of misrepresentation (Section 19)

 When consent to an agreement is caused by misrepresentation, the agreement is a contract voidable at the option of the party whose consent was so caused. A party to a contract whose consent was so caused may, if he thinks fit, insist the contract shall be performed, and that he shall be put in the same position in which he would have been if the representation made had been true.

Distinction between fraud and misrepresentation 

Firstly in case of misrepresentation the representation is made innocent while in case of fraud the representation is made with an intention to deceive the other party. Secondly  in general, damages cannot be claimed for misrepresentation. The contract merely becomes voidable. But fraud, in addition to rendering the contract voidable is a cause for action in tort for damages. Lastly, in case of fraud, except fraud by silence, defrauding party cannot set up the defence that the defrauded party had the means of discovering the truth or could have done so with ordinary diligence, but in case of misrepresentation it would be a good defence (See Exception to Section 19).

Loss of right to rescind the contract

 It is clear from Sections 19 and 19A that when a contract is induced by coercion, undue influence, fraud or misrepresentation, it is voidable at the option of the party whose consent was so caused. Thus the aggrieved party has the option either to avoid the contract or to affirm it. But in the following cases the aggrieved party would disable himself from rescinding the contract. 

1. When the aggrieved party affirms the contract.

 2. When reasonable time for rescission expires.

 3. When third party acquires rights in the subject-matter of the contract

 4. When restitution is not possible.

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