This article has been written by Tulika Rawat, pursuing a Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution from LawSikho.

This article has been edited by Shashwat Kaushik.

Introduction

The concept of forming legal relationships via contracts has been in existence for an extended period of time. In contemporary society, businessmen as well as the general public frequently enter into contracts for multiple types of transactions, making them a potent instrument for constructing a legal connection between two or more parties. A contract serves as the essence and core of a commercial transaction, outlining the obligations and liabilities of all involved parties and safeguarding their rights to ensure the fair implementation of the agreement. However, what will happen if one party presents false or inaccurate information within an already established contract? Through this article, I will give you an insight into the concept of misrepresentation and its impact on contract law.

Meaning of misrepresentation

There are several exchanges of statements between the parties preceding the establishment of a contract and during the negotiation stage; some statements are only for negotiation and persuasion for sales pitches, some become contractual terms, and some become mere representations that are relied upon for establishing the contractual relationship between the parties.

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Misrepresentation occurs when:

  • One party (A) gives false or inaccurate statements of facts or law without any ill-intention to another party (B);
  • which induces the latter to enter into a contract, which they would not have done otherwise if the facts had been accurately conveyed; and
  • may negatively affect or incur some loss to them.

Illustration: A sells their used washing machine to B, stating that it is in perfect working condition, unaware of the fact that there is leakage in it. This will result in misrepresentation on the account of A.

Misrepresentation of facts makes a contract voidable, but misrepresentation of the law can’t be avoided because ignorance of the law is not allowed.

Misrepresentation under Indian Contract Act, 1872

Misrepresentation is a prominent concept of the Indian Contract Act of 1872 (hereinafter referred to as “the Contract Act”), especially in regard to the commercial domain. As business deals take place frequently and in huge numbers, misrepresentation of cost and/or anticipated risk can amount to serious damages. Therefore, the Contract Act explains the concept of misrepresentation as a medium to make people understand the importance of stating accurate facts that are backed by trustworthy sources while intending to form a legal relationship with the other party, safeguard the rights of the aggrieved party in the event of misrepresentation, and provide a legal remedy for the same. In the landmark case of Mohun Lal vs. Sri Gungaji Cotton Mills Co., the court delved into the intricate nature of warranted statements and the significance of reliable information sources. The court emphasised that a statement can only be considered warranted if the information upon which it is based originates from a trustworthy and reliable source. This principle underscores the importance of verifying and corroborating information before making assertions or drawing conclusions.

The court’s observation in this case highlights the crucial role of credibility and reliability in the realm of communication and decision-making. It acknowledges that not all sources of information are created equal. Some sources, such as reputable news organisations, academic institutions, and government agencies, have earned a reputation for accuracy and trustworthiness over time. Statements made based on information obtained from such sources are more likely to be considered warranted and credible.

Conversely, statements based on information from unreliable or biassed sources may not be accorded the same level of credibility. This is because unreliable sources may have a vested interest in disseminating inaccurate or misleading information. Therefore, it is essential to critically evaluate the source of information and consider its reliability before accepting or repeating a statement as fact.

The court’s observation also underscores the importance of responsible reporting and the ethical obligations of journalists and media outlets. It emphasises the need for thorough fact-checking and verification of information before publishing or broadcasting news stories. By adhering to these principles, journalists can help ensure that the public receives accurate and reliable information, which is vital for informed decision-making and the proper functioning of a democratic society.

Misrepresentation, according to Section 18 of the Contract Act, means and includes:

  • making a positive assertion of a false statement without unwarranted confidence, believing it to be true despite it being wrong;
  • Any breach of duty caused without any intention to deceive the other party in order to gain an advantage or mislead another to make a wrongful gain out of them;
  • Innocently causing a party involved in an agreement to misunderstand the essence of the subject matter of the agreement.

In simple language, misrepresentation occurs when one of the parties involved in an agreement makes statements of facts with apparent confidence that are false or inaccurate in nature in front of another party without any mala fide intention. This influences the other party’s decision to enter into a contract and may incur a loss.

Essentials of misrepresentation

An event of misrepresentation includes the following elements:

  • False representation of facts: A party must state a material fact that is false or later on becomes false, but it is their duty to inform the other party about the change of facts before the contract is formed. The other party did not know inaccurate facts while signing up for the contract.
  • Unwarranted confidence: The facts stated with positive assertions don’t have any trustworthy source to support them.
  • Influential: The presented facts influenced the other party’s decision to enter into a contract and have caused them to comprehend the subject matter in the wrong manner.
  • Innocent intention: There was no intention to deceive the other party in order to inflict some negative effect on them or acquire some gain from them.
  • Breach of duty: The wrong statement of facts given by the defaulting party must have caused some adverse effect on the other party due to some violation of duty on his account.
  • Pre-contractual stage: The false statement of material fact must be given before the formation of the contract.
  • Post-contractual stage: A party is liable for an event of misrepresentation only when the discovery is made after the establishment of the contract.
  • Damages: The misled party must have incurred some loss due to the misrepresentation.

Types of misrepresentations

There are three types of misrepresentations, which are as follows:

Innocent misrepresentation

Misrepresentation was made with genuine belief in the facts that had been stated and with innocent intention.

Illustration: Mr. X says confidently that his guitar works in perfect condition as he plays it occasionally. By witnessing such confidence, Mr. Z agrees to buy the guitar, discovering later on that some strings of the guitar are not working. Here, the misrepresentation would be innocent, as Mr. X was confident that the guitar was in perfect condition and had no intention to deceive Mr. Z.

Negligent misrepresentation

Misrepresentation is caused when statements of wrong facts are given with negligence or without any basis, but the presenter has no ill-intention towards the other party.

Illustration: Varun is a real estate agent, and he claimed that the value of the apartment in which Dev showcased interest is Rs. 15,0000. Dev proceeded to sign the contract for the apartment but later found out that its actual cost was only Rs. 10,000. Varun is at fault in this situation, as he failed to accurately determine the exact cost of the apartment and provided incorrect information.

Fraudulent misrepresentation

Misrepresentation occurs when one party deceptively conceals some material information and conveys false statements to another contractual party in order to mislead them into entering into a contract with them and acquiring wrongful gain from them. In the landmark case of Derry vs. Peek, the court established a significant precedent regarding fraudulent misrepresentation. The court defined fraudulent misrepresentation as statements that are intentionally false or made with recklessness or carelessness as to their truth. This definition has had a profound impact on the legal landscape, providing a framework for determining liability in cases involving misrepresentation.

The court’s decision in Derry vs. Peek emphasised the importance of truthfulness and accuracy in representations made during transactions. Fraudulent misrepresentation occurs when a statement is made that is known to be false or is made without regard to its truth or falsity. This includes statements made with reckless disregard for the truth, as well as statements made carelessly without verifying their accuracy.

The court recognised that fraudulent misrepresentation can have serious consequences for individuals and businesses. When a false statement is made, it can induce another party to enter into a contract or make a decision that they would not have made had they known the truth. This can result in financial losses, emotional distress, and other damages.

To establish fraudulent misrepresentation, seeral elements must be proven. First, it must be shown that a false statement was made. Second, it must be demonstrated that the statement was made with knowledge of its falsity or with reckless disregard for its truth or falsity. Third, it must be proven that the statement was relied upon by the other party, and that their reliance on the statement caused them to suffer damages.

The decision in Derry vs. Peek has been cited in numerous subsequent cases and has helped to shape the law of fraudulent misrepresentation. It has contributed to the establishment of a legal framework that protects individuals and businesses from the harmful consequences of false and misleading statements.

Illustration: A cosmetic firm doesn’t provide a cautionary note stating the severe side effects of one of their body lotions, which they recently introduced in the market; they proceeded to advertise it in the market, which led to its extensive sale. Subsequently, the consumers started reporting adverse effects from that specific lotion. In this case, it is possible to deduce that the cosmetic company is accountable for fraudulent misrepresentation as they knowingly obscured the side effects and had the intention to deceive the consumers. 

Effects of misrepresentation

Section 19 of the Contract Act states that those agreements are voidable in nature when procured without free consent. It expresses that any agreement obtained by coercion, fraud, or misrepresentation will be deemed voidable at the discretion of the aggrieved party.

Here, the adversely affected party in the contract has two options as remedies: either to rescind (revoke) the contract or affirm (accept) it. This shall also be noted, if the aggrieved party chooses to affirm the contract with free will, in the future they will lose the right to rescind. But, if they choose to straight away rescind the contract, the defaulting party has to restore all the wrongful gain they have acquired through misleading the other party in the contract. In the case of Long vs. Lloyd, the defendant sells his used truck to the plaintiff and unintentionally provides him with incorrect information about its mileage. The court denies granting rescission of contract because, as the plaintiff continued to use the truck even after discovering the wrong information provided to him, his action was construed as an acceptance of the truck, which led to the affirmation of the contract.

Remedies

All the below-mentioned remedies are available to the aggrieved party under the Contract Act.

Rescission

It is the cancellation of the contract, bringing both parties back to their original positions as they had before the contract. This influences their contractual relationship by invalidating all the contractual obligations and rights of the parties. In the case of Union of India vs. Rampur Distillery and Chemical Co. the Hon’ble Court affirmed the right of rescission to a party in a contract if the other party has failed to perform their obligations. In another case of Shyam Singh vs. Daryao Singh (dead), By Lrs. & Ors. the Hon’ble Supreme Court asserted the importance of timely claiming the remedy of rescission. The court also held that if there is an unreasonable delay in seeking rescission, it would amount to a waiver of rights.

The act can be done unilaterally, by one party equitably revoking the contract in reciprocity for a material breach of duty by the other contractual party, while it can also be done mutually, where both parties jointly decide to discharge their remaining duties and terminate their rights as per contract. In the case of Solle vs. Butcher, the court granted rescission on the grounds of mutual ignorance about the facts in relation to the Rent Control Act.

Damages (indemnity of loss)

The negatively affected party has the entitlement to claim compensation against the damages that have occurred to them due to misrepresentation. It is available in those cases where rescission is not feasible, as the financial loss incurred by the party is significant .

In the case of Fateh Chand vs. Balkishan Dass (1963), the Hon’ble Supreme Court held that when a contract gets broken, the party who bears the loss due to such a breach of duty is entitled to claim damages for the party in default. The court highlighted that compensation shall be for any loss or damages that occurred in the natural course of events from such a breach  or that the parties anticipated when they formulated the contract as a possible outcome of the breach. The same judgement has been upheld in the case of ONGC vs. Saw Pipes Ltd. (2003).

Specific performance

The aggrieved party has the option to assert that the defaulting party will fulfil his obligation as decided in the contract. The court will first examine the case and see whether it is possible for the defaulting party to carry out the decided obligations or not. If it seems impossible, then the court may grant damages or rescission instead.

In the landmark case of Kishan Lal vs. Gajraj Singh & Others, the court delved into the intricacies of contract law and the principles of equity. The court’s decision established a precedent that has had far-reaching implications in shaping the enforceability of contracts and the rights of parties involved. At the heart of the case was the question of whether specific performance—a legal remedy that compels a party to fulfill their contractual obligations—would be granted in favor of a party who had obtained the contract through misrepresentation or concealment of material facts.

The court’s analysis centred around the fundamental principle of equity, which holds that it is unjust and unfair to enforce a contract where one party has been misled or deceived into entering into it. In this case, the court found that the plaintiff, Kishan Lal, had misrepresented certain material facts to the defendant, Gajraj Singh, during the negotiation of their agreement. These misrepresentations had induced Gajraj Singh to enter into the contract, and the court deemed it inequitable to allow Kishan Lal to benefit from his own wrongdoing.

The court emphasized that specific performance is an extraordinary remedy that should only be granted when it is fair and just to do so. In cases where there has been misrepresentation or concealment of material facts, the court reasoned, it would be against the principles of equity to enforce the contract. Such enforcement would essentially reward the party who had engaged in deceptive behaviour and deprive the misled party of their right to make an informed decision.

Furthermore, the court highlighted the importance of transparency and honesty in contractual dealings. It stated that parties to a contract have a duty to disclose all material facts that may influence the other party’s decision. Concealment or misrepresentation of such facts undermines the integrity of the contract and violates the fundamental principles of fairness and justice.

The court’s decision in Kishan Lal vs. Gajraj Singh & Others serves as a cautionary tale for parties who may be tempted to engage in deceptive practices during contract negotiations. It underscores the importance of transparency, honesty, and adherence to ethical principles in contractual dealings. By denying specific performance to Kishan Lal, the court sent a strong message that misrepresentation and concealment of material facts will not be tolerated and will have legal consequences.

Exceptions

There are certain exceptional circumstances where the discovery of misrepresentation might not invalidate a contract, and the rights and liabilities of both parties as per the contract will continue to exist even after such disclosure.

Here are the key exceptions given under the Contract Act:

Non-reliance on misrepresentation

In a case where the aggrieved party didn’t rely on the information given by the defaulting party at the stage of contract formation, but rather confirmed the facts with their understanding and assumed that fact to be true for a particular purpose, such a case might not invalidate a contract. 

Opportunity for verification

In this case, the party aggrieved by the misrepresentation gets a fair chance to verify the material facts being told to them, but they disregard the opportunity to ascertain the facts themselves. In such a scenario, the defaulting party will not be held liable under this circumstance, and the contract will prevail.

Waiver of the right to rescind

An aggrieved party will lose their right to rescind the contract if, after gaining knowledge of the misrepresentation that occurred to them, they either affirm the contract or continue to act in such a manner that showcases their acceptance of the contract. In the landmark case of Kedar Nath Motani & Ors. vs. Prahlad Rai & Ors., the court delved into the intricate legal principles governing misrepresentation and the right to rescind a contract. The court emphasized that if a party discovers misrepresentations made during the formation of a contract but subsequently continues to perform their contractual obligations or accepts benefits under the contract, their actions may be interpreted as an affirmation of the contract and a waiver of their right to rescind.

Central to the court’s analysis was the concept of affirmation. Affirmation occurs when a party, with full knowledge of the misrepresentation, voluntarily continues to perform their contractual obligations or accepts benefits under the contract. Such conduct, the court reasoned, indicates the party’s acceptance of the contract despite the misrepresentation and their willingness to be bound by its terms. In such circumstances, the court may be reluctant to grant rescission, as it would undermine the principle of sanctity of contracts.

The court further held that a party seeking to rescind a contract based on misrepresentation must act promptly upon discovering the misrepresentation. Delay in seeking rescission or continued performance of contractual obligations after gaining knowledge of the misrepresentation may be viewed as evidence of affirmation and waiver of the right to rescind.

In the specific case of Kedar Nath Motani & Ors. vs. Prahlad Rai & Ors., the plaintiff had entered into a contract for the purchase of land based on certain representations made by the defendant. However, after the sale was completed, the plaintiff discovered that the representations were false. Despite this knowledge, the plaintiff continued to make payments under the contract and even sought additional benefits from the defendant. The court found that the plaintiff’s conduct was inconsistent with their intention to rescind the contract and amounted to an affirmation of the contract. Consequently, the court declined to grant rescission and upheld the validity of the contract.

This case serves as a cautionary tale for parties entering into contracts, highlighting the importance of conducting thorough due diligence and promptly addressing any misrepresentations discovered during the contractual process. It also emphasises the significance of acting consistently with one’s intention to rescind a contract to preserve the right to do so effectively.

Statutory provisions

There are, however, certain statutes that can be used to negate the rule of misrepresentations under some circumstances. For instance, under some consumer protection laws, some types of representation made by a seller may not give access to remedies, where the buyer could have found out the information regarding the product themselves by conducting some physical self-examination.

The above-mentioned exceptions illustrate that while misrepresentations provide grounds for a party to challenge the validity of a contract, some exceptional circumstances can help the defaulting party mitigate or nullify the effect of misrepresentations, completely depending on the conduct of the parties involved.

Differentiation between fraud and misrepresentation

The Act of fraud has been defined under Section 17 of the Contract Act. Both Fraud and Misrepresentation involve giving false statements, but they differ in intention and severity,

No.Aspect                         Fraud    Misrepresentation
1. Definition A deliberately done act with the intention to deceive and gain benefits wrongfully. An act that involves either genuine belief or negligence while making a false statement.
2.SectionSection 17 of the Indian Contract Act, 1872.Section 18 of the Indian Contract Act, 1872.
3. Intention Involves the intention to deceive or harm. It may occur without involvement or the intention to deceive.
4.KnowledgeHave accurate knowledge regarding false information being conveyed to another person.Doesn’t have accurate knowledge of false statements that have been given to the other party.
4.ElementsIntention to deceive; false representations of facts; intention to inflict a negative affect on another person.Related to contracts; reliance on false statements; may involve innocence or negligence; no intention to deceive.
5.Legal consequenceIt is considered a serious offence and may lead to criminal chargesPrimarily considered a civil offence with limited legal consequences.

Conclusion

The Indian Contract Act, 1872, encompasses provisions related to misrepresentation that work as potent tools to ensure the proper contractual behaviour of the parties involved in a contract or legal agreement. The provisions impart information about the acts that may amount to a breach of duty so that the parties intending to create a contract with each other have a better understanding of maintaining integrity and diligence in the course of their contractual relationship. They also provide immediate protection in the form of remedies to any party who has been given deceptive information, guaranteeing that no one is misled or deceived into entering into a contract. 

 References

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