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This article is written by Isha, a second-year student at Bharti Vidyapeeth, New Law College Pune. This article talks about Misrepresentation in Contract.

Introduction

A misrepresentation is an untrue statement of a material fact made by one party which affects the other party’s decision in corresponding to a contract. If the misrepresentation is identified, the contract can be declared void and depending on the situation, the unfavourably impacted party may seek damages. In such a contract dispute, the party who made the misrepresentation becomes the defendant and the aggrieved party is the plaintiff.

Misrepresentation in contract law is especially important in business dealings where huge transactions occur with high frequency. Misrepresentations of the value and/or risk correlated with an agreement can cause enormous financial losses to businesses and individuals while increasing the risk of collaborative business ventures. Accordingly, misrepresentation contract law is vital to ensuring fairness and diminishing the risk of entering into agreements between individuals and businesses.

Definition

Misrepresentation is defined under Section 18 of the Indian Contract Act, 1872 which says, a misrepresentation is a form of a statement made preceding to the contract being completed. There are two varieties of statement that can be performed before a contract is formed, these will either:

  1. Form part of the contract.
  2. Not form part of the contract, therefore it becomes a representation.

Concept of Misrepresentation

For understanding the concept of misrepresentation first, we need to know the meaning of representation in terms of the contract. A representation is said to be such statement which generates the entry into a contract but is not a part of a term of the contract.

Misrepresentation is about giving of inaccurate information by one party (or their agent) to the other before the contract is made which induces them to make the contract. If a person makes a contract in reliance on misrepresentation and has to face loss as a result, they can revoke the contract or claim damages.

Unwarranted Statements

A statement made without any reasonable basis is an unwarranted statement. When a person makes a positive statement of a fact without any trustworthy source of information and believes that statement to be true, the act amounts to misrepresentation. When something is unwarranted it is not called for under the provided circumstances. For instance, arguing the merits of someone’s talent is one thing, but addressing them stupid is unwarranted.

Breach of duty

Once a duty has been established in relation to the defendant we must find that the defendant has breached the duty. A breach of the duty of care occurs when one fails to achieve his or her duty of care to act wisely in some aspect. Commonly, if a party does not act in a reasonable manner to prevent foreseeable injuries to others, the duty of care is breached. Breach of duty is defined in a very interesting case named Vaughn V. Menlove which it states that the defendant is found to have overdue of the claimant and if he acts below the reasonable standard then a breach of duty would have been committed 

  • they may find out the cause of the breach and try to remedy it;
  • they may dispute that a breach has occurred;
  • they may argue that there is an exclusion clause or other terms in the contract limiting their liability for the breach; or
  • they might argue that there is a cause for their breach, or that the contract is invalid.

Inducing mistake about subject matters

Inducing mistake about subject matter involves around mistake of fact. This happens when both the parties misunderstood each other leaving them at a crossroads. Such a wrongful act or a mistake can be because of an error in understanding, or ignorance or omission etc. But a mistake is never intentional, it is an innocent commanding. These mistakes can either be unilateral or bilateral which is explained below.

Bilateral Mistake

Section 20 defines a bilateral mistake. Where both parties of a contract are under a mistake of fact required to the agreement, such a mistake is called a bilateral mistake. Here both the parties have not permitted or given their consent in the same sense as per the definition of consent. Considering there is an absence of consent altogether the agreement is void.

However, to make an agreement void the mistake of fact should be about some crucial fact that is important in a contract. So if the mistake is about the presence of the subject matter or its title, quality, price etc then it would be a void contract. But if the mistake is of something inconsequential, then the agreement is non-void and the contract will remain in place.

For instance, X agrees to sell to B his goat. But at the point of the agreement, the goat had already died. Neither X nor B was cognizant of this. Therefore, there is no contract at all i.e. the contract is non-enforceable due to a mistake of fact.

Unilateral Mistake

A unilateral mistake is when only one person to the contract is under a mistake. In such a case the contract will not be considered void. So Section 22 of the Act states that just because one party was under a mistake of fact the contract will not be voidable or void. So if only one party has made a mistake of fact the contract remains a valid contract.

However, there are some limitations to this. In certain conditions, even a unilateral mistake of fact can occur withdrawing or voidable agreement. 

Types of Misrepresentation

There are three types of misrepresentation present in the contract:

  • Fraudulent misrepresentation

Fraudulent misrepresentation will happen when a false representation is made and the party making the representation let say X knew it was false or was reckless as to whether it was correct or incorrect- the lack of an accurate belief in its truth will present it a fraudulent one. If A honestly believes the statement to be true it cannot be a fraudulent misrepresentation, negligence in creating a false statement will not result in fraud. However, if it can be shown that A suspected that the statement might be incorrect or wrong, but made no enquiries to check the position, that will be sufficient. It will not be mandatory to prove a dishonest motive.

  • Negligent misrepresentation

Negligent misrepresentation under the Misrepresentation Act 1967 (MA 1967) befalls where a declaration is made by one contracting party to another negligently or without reasonable grounds for believing its truth. The test is an impersonal one.

There is no obligation to establish fraud. If the innocent party can prove the statement was false, it will be for the maker of the statement to establish that it rationally believed in the truth of the statement (that is, the representation).

A solution for negligent misrepresentation remain at common law, however, its use in contractual situations has been considerably lessened as a result of Section 2(1) of the MA 1967.

  • Innocent misrepresentation

Misrepresentation made completely without fault can be described as an innocent misrepresentation.

If X is unable to show it had objective grounds to believe its declaration was true the misrepresentation will be fraudulent or negligent.

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Suppression of Vital Facts

Raymond Woollen Mills Limited v. Income Tax Officer, Centre Circle Xi, Range Bombay And Others 

In the above-cited case, the appellant has argued that the Department has made a grievous mistake. In coming to the conclusion. In this case, the court does not have to give a final decision as to whether there is a suppression of evidence. The fact is not a thing to be considered at this stage. We are of the view that the Court cannot strike down the reopening of the case in the facts of this case. It will be open to the assessee to the understatement of profits. This information was obtained by the Revenue in a subsequent year’s assessment proceeding. There was prima facie of the fact on the basis of which the department could reopen the case further. The sufficiency or the correctness of the fact or material is not a thing to be considered at this stage.

Raj Kumar Soni Vs. State of U.P 2007

Here in the case again the suppression of material facts has been held to be the opposition of process of law and it has been held that the party guilty of not representing the right facts is not to be benefited with any perks as it has to be held that such a party would not have to knock the doors of the court with clean hands.

Remedies of Misrepresentation 

As we know the contract made in misrepresentation is voidable which is not done intentionally by the party. So by keeping this in mind, The remedies for misrepresentation are:

  • Rescind: Rescind means to cancel. When the aggrieved party wants he can claim for cancellation of the contract and/or damages. Under contract law, rescission is defined as the unmaking of a contract between the parties. Rescission is the unwinding of a transaction. This is made to bring the parties, as far as possible, back to the position in which they were before they entered into a contract (the status quo ante).
  • Insist upon the performance: The aggrieved party can claim to the first party who have committed misrepresentation to get the object in the manner which was prior to the contract that they directly.

Limitations available to remedies

A condition can be included in a contract that limits the remedies that will be available wherever a party has the right to make a misrepresentation claim. For instance, such a clause could limit the remedies to those available for breach of contract- definitely excluding the right of the innocent party to revoke the contract.

Representation of state of mind

Representation initiates and induces a contract. It is the information by which a contracting party decides whether to continue with the contract. A representation is an express or implied statement that one party to the contract forms to the other before or at the point of the contract. It is entered with regard to past or existing fact. An illustration might be that a seller of some commodity represents that no notification of patent infringement had been received.

A representation initially cannot be a part of a contract and a claim for damages due to a misrepresentation ordinarily would not be allowed. Instead, a claim that a misrepresentation induced a contract might be pursued in fraud, either to revoke the contract or for damages. In some cases, a claim might be based on the tort of negligent misrepresentation.

Consequences of Making a Misrepresentation

The consequences of misrepresentation are explained under the case of Bskyb V. EDS in this case, judgement passed in the year 2010, that EDS had made fraudulent misrepresentations as to its capacity to deliver a project within a specific timetable and in a particular manner that it had carried out a proper investigation to enable it to make this statement. The judge also found that it was a consequence of these misrepresentations that BSkyB had been induced to enter into a contract with EDS. The damages that could be payable as a result have been determined at £200 million or more. There was a frontier of liability in the contract to £30 million but both parties have accepted that such a frontier is not effective to limit liability for fraudulent misrepresentation.

Conclusion

Overall, by concluding the said factors we know that, administer a contract void or voidable based upon the specific circumstances of the case. If a contract is a void then it cannot be enforced by both of the parties, whereas if a contract is interpreted as voidable then although it is a valid contract it can be cancelled or revoked. Essentially, whilst a void contract cannot be performed, a voidable contract can depend upon either of the parties after they decide to cancel it. If there has been a misrepresentation or a mistake the contract may be declared void and therefore be abolished. If duress or undue influence has occurred, then the contract may be rendered voidable and thereby capable of being cancelled.

References


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