1) Introduction:
When the false statement is made with having knowledge of that it is false and with the intention of mislead the other party and make the other party to enter into a contract then it is known as fraud. But when the person makes the false statement on believing that statement is true and no intention of to mislead other party then it is known as “Misrepresentation”.
Misrepresentation is not an intentional wrong. It may be quite innocent. Misrepresentation is not a tort so the damages cannot be claimed but in Section 75 of the Indian Contract Act, 1872, a person rightfully revoking a contract is entitled to any compensation for any damage sustained by him or her through the non-fulfilment of agreement. Misrepresentation by whatever means it is caused does not make the agreement voidable when the party against whom misrepresentation is done has the means of discovering the truth by the exercise of ordinary caution.
Misrepresentation and fraud are completely different with each other. When the parties enters into a contract on the basis of misrepresentation then this contract is voidable contract because the consent of the party is obtained by misrepresentation. Misrepresentation is given under section 18 of the Indian Contract Act, 1872. For e.g., Mr. X sells an unsound horse to Mr. Y, but Mr. X himself does not have an idea or knowledge about this fact that the horse is of an unsound mind. He tells Mr. Y that the horse is sound. In this case there is misrepresentation from Mr. X.
2) Elements of Misrepresentation:
Misrepresentation includes
- Positive Assertion: It is an explicit statement of fact which is not true by a person, though he believes it is true statement.
Case Law: Oceanic Steam Navigation Co. v. Sunderdas Dharmsey[1]
In this case, a ship was hire by the defendant on the positive assertion of plaintiff that it was not more than 2800 registered tonnage but the ship unknown to the plaintiff was of big size. It was held that defendant could avoid the agreement.
- False Statement and breach of duty with no intention to mislead: There must be a false statement made without an intention to mislead other party.
Case Law: Orient Banking Corporation v. John Fleming [2]
There was settlement of some matter between the plaintiffs and defendants. The plaintiffs had no time to read the contents of the deed so they signed it under the belief that it was a matter already settled between them but the deed contained a release in favour of the defendants. It was held that although there was no duty to communicate the contents of the deed yet once the plaintiffs placed credit on the defendants, the defendants were under a duty to place full facts before the plaintiffs.
- Causing innocently to make a mistake: When the party causes innocently to another party a mistake about the subject matter of the contract then it is considered as a misrepresentation.
Case Law: R.v. Kyalsat[3]
In this case, in the prospectus of the company it was mentioned that the regular dividends were being paid but the company had been running into losses for several years and the dividends were being paid out of the accumulated interest in the past. It was held to be a misrepresentation.
3) Remedy & Effect of defect in consent:
In case of defect in the consent one party or the other may have either,
1) Right of Rescission of the contract:
When the consent of a party to the contract has been obtained by misrepresentation, rescission of the contract is the common remedy available in all the cases. The rescission of a voidable contract may be conveyed or cancel in the same manner and subject to the same rules, as apply to the communication or cancellation of a proposal. The party entitled to revoke a voidable contract may do so by a notice to the other party, or taking such steps as may be necessary under the circumstances of the case. A voidable contract will be avoided only if the party having a right to do so avoids it. If instead, he or she affirms the contract then, the contract will be binding on the both the parties.
- Limits to the right of rescission:
1. When the contract is affirmed:
When the contract is affirmed, then it is a valid and binding contract against both the parties. The affirmation of a contract may be made either expressly or implicitly or it could be inferred from a person’s conduct.
2. Lapse of time:
A person having a right to avoid the contract must do so within a reasonable time. Failing to exercise this right in time may mean affirmation of the contract.
3. Acquisition of a right by a third party:
The right of rescission may be gone if before the contract has been rescinded some third party has acquired a right in the subject-matter of the contract. A voidable contract is valid until avoided and it becomes void only after it has been avoided. There is a possibility that so long as the contract has not been avoided, there could be creation of an interest in favour of a third party.
2) Right to claim compensation:
Apart from the remedy of rescission of contract, the remedy of damages or compensation may also sometimes be available to the parties to the contract, in cases where the consent of one of the parties has been obtained by misrepresentation.
1. Damages in cases of fraud: It has already been noted that fraud is a tort. Therefore, a party whose consent has been obtained by a fraudulent statement, may seek rescission of the contract as a contractual remedy and may also claim damages under the law of torts.
2. Damages in case of non-fraudulent misrepresentation:
It has already been noted that the (English) misrepresentation Act, 1967 empowers the court in case of other than a fraudulent misrepresentation to allow damages in lieu of rescission of a contract.
3. Duty of a party rescinding the contract to pay compensation:
Sometimes a party entitled to rescind a voidable contract may have already received some benefit under the contract. Equity demands that if he or she avoids the contract, he or she should also restore the benefit which he or she have received from the other party.
4) Case Laws:
1. Derry v. Peek:[4]
In this case, the directors of a company stated in the prospectus of the company that they had been authorised to run tramways with steam power. The directors of the company honestly believed that the sanction from the board obtained as a matter of course but the sanction from the board had not been obtained. The permission for the use of steam power has been refused by the Board of Trade. In this case, it was held that there was a mere misrepresentation but no fraud as the statement had been made without any intention to deceive.
2. Noorudeen v. Umairathu Beevi:[5]
This case is a picture where the transaction was put away on the ground of fraud and misrepresentation. The defendant, who was plaintiff’s son got a document carry out from the plaintiff describing it as hypothesize deed of the plaintiff’s property. In fact, the document executed was sale deed of the plaintiff’s property which was obtained by fraud and misrepresentation. The plaintiff was a visually impaired man and the sale was for an insufficient consideration. The ownership of the property was not given to the defendant. It was held the deed which was got executed by fraud and misrepresentation, was rightly put away.
5) References:
1.https://blog.ipleaders.in/misrepresentation-under-the-indian-contract-act-1872-an-overview/
2.https://www.legalserviceindia.com/legal/article-7817-misrepresentation-under-the-indian-contract-act-.html
3. https://indiankanoon.org/doc/1270593/
4.https://docpro.com/blog74/what-is-a-misrepresentation-under-contract-law-with-examples
5. https://lincolnandrowe.com/2021/11/02/law-misrepresentation-contract/
[1] https://www.law.cornell.edu/supremecourt/text/214/320
[2] https://www.lawkaranconsultancy.in/oriental-bank-corporation-vs-john-fleming/
[3] https://www.legalserviceindia.com/legal/article-6895-does-silence-amount-to-fraud-.html
[4] https://lawprof.co/contract/misrepresentation-cases/derry-v-peek-1889-14-app-cas-337/
[5] https://indiankanoon.org/doc/1680063/
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