Misrepresentation in Contract Law | Law Optional Notes for UPSC PDF Download

Misrepresentation in Contract Law

• A representation is 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 without any malicious intent, leading them to enter the contract.
• If an individual enters into a contract based on misrepresentation in the Indian Contract Act and suffers losses, they have the right to either rescind the contract or seek compensation for damages.

Importance of Misrepresentation

• Misrepresentation is crucial in contract law, especially in business transactions involving significant amounts of money and occurring frequently.
• False statements regarding the value or risk associated with an agreement can result in substantial financial losses for both businesses and individuals and increase the risks of collaborative business ventures.
• Ensuring fairness and minimizing risks in agreements between individuals and businesses makes misrepresentation in contract law indispensable.

Consequences of Misrepresentation

• If 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.

Example of Misrepresentation

For instance, in a real estate transaction, if a seller falsely claims that the house has never experienced flooding to entice a buyer, and it is later revealed that the property is prone to flooding, the buyer may have grounds to rescind the contract or seek compensation for the misrepresentation.

Understanding Misrepresentation in the Indian Contract Act

• Misrepresentation Defined: In the Indian Contract Act of 1872, misrepresentation is described in Section 18 as a statement made prior to the finalization of a contract.
• Types of Statements: Statements made before a contract is formed can be categorized into two types:
  • Statements that form a part of the contract.
  • Statements that are not part of the contract and are considered representations.
• Validity of Contracts: The presence of misrepresentation does not automatically invalidate a contract. Specific conditions must be met:
  • The contract remains valid if the statement could have been discovered through reasonable diligence.
  • If the statement does not impact the consent of the party to whom it was addressed, the contract remains unaffected.
• Legal Case Example: An instance of misrepresentation is illustrated in the case of Derry v. Peek. Here, a tramways company owner falsely claimed to have received approval for steam trams when the permission was pending. Despite genuinely believing in the statement's accuracy, this led to financial losses for shareholders.
• Proof of Misrepresentation: It is crucial to note that the responsibility of proving misrepresentation in Contract Law lies with the party alleging it.

Understanding Misrepresentation in Contracts

• False Representation of a Fact: This occurs when a statement or assertion is made that is either untrue or misleading. For instance, if a seller claims that a car has only been driven for 10,000 miles when, in reality, it has been driven for 50,000 miles.
• Causal Link to Consent: The misrepresented fact must be significant enough to influence the party's decision to enter into the contract. For example, if a real estate agent falsely claims that a property has no history of flooding, leading a buyer to make a purchase based on this information.
• Intention to Induce: Misrepresentation involves making a statement with the purpose of deceiving or inducing the other party to agree to the contract. An example could be a seller intentionally misrepresenting the quality of a product to secure a sale.
• Timing of the Misrepresentation: The false statement must be made before the contract is finalized or concluded. If a party lies about the condition of a product after the contract is signed, it may not constitute misrepresentation.
• Absence of Deception: The misrepresentation should not be made with the intention to deceive the other party knowingly. For instance, if a seller genuinely believes a piece of artwork is an original when it is a replica, it may not be considered misrepresentation.

Evaluating Misrepresentation in Legal Context

In the case of Rickview Construction Co. v. Raspa, it was established that in situations where a contract is based on misrepresentation, the party at a disadvantage holds the right to void the contract and may seek legal remedies such as damages through the court system.

Types of Misrepresentation in Contract Law

Three types of misrepresentation can occur in a contract:

Fraudulent misrepresentation

• Fraudulent misrepresentation occurs when a party knowingly makes a false statement or is reckless about its accuracy. It is crucial that the party making the false statement genuinely believes it to be true for it to be considered fraudulent. 
• Negligence in making false statements does not amount to fraud. However, if it can be demonstrated that the party suspected the statement might be false but made no effort to verify its accuracy, that is sufficient to establish fraudulent misrepresentation.

Negligent misrepresentation

• Negligent misrepresentation takes place when a party makes a declaration negligently or without reasonable grounds to believe it is true. Unlike fraudulent misrepresentation, there is no requirement to prove fraudulent intent. 
• If the innocent party can show that the statement was false, the burden shifts to the party who made the statement to prove they had a reasonable belief in its truthfulness.

Innocent misrepresentation

• Innocent misrepresentation refers to a misrepresentation made without any fault. If a party cannot demonstrate they had objective grounds to believe the statement was true, the misrepresentation is categorized as either fraudulent or negligent.
• For example, in the case of Raymond Woollen Mills Limited v. Income Tax Officer, Centre Circle XI, Range Bombay and Others, the court addressed a situation where the appellant argued against a serious mistake made by the Department. The court did not delve into whether there was a suppression of evidence, as it was not pertinent at that stage. It was determined that the reopening of the case could not be struck down in those circumstances.
• In another case, Raj Kumar Soni vs. State of U.P. 2007, it was emphasized that the suppression of material facts goes against legal principles. Parties withholding correct facts are not entitled to benefits since they are considered to be approaching the court with unclean hands.

Effects of Misrepresentation

• Section 19 of the Indian Contract Act addresses situations where consent to an agreement is obtained through misrepresentation.
• According to this section, the aggrieved party has the right to demand the contract's performance or choose to avoid/rescind the contract.
• In the legal case of Long v. Lloyd (1958), a scenario unfolded where the defendant sold a lorry to the plaintiff by falsely claiming it was in excellent condition.
• Upon the plaintiff's first journey with the lorry, significant defects were discovered, prompting the need for repairs.
• Despite the problems, the plaintiff agreed to share half the repair costs with the defendant.
• Unfortunately, the lorry experienced a complete breakdown on the subsequent journey, leading the plaintiff to seek contract cancellation.
• The court's ruling in this case highlighted that the plaintiff had been made aware of the misrepresentation during the initial drive.
• Under Contract Law principles, the plaintiff had the opportunity to withdraw from the contract upon discovering the misrepresentation.
• Since the plaintiff chose to continue with the contract despite knowing about the misrepresentation, they were unable to claim damages solely based on that misrepresentation.

Remedies of Misrepresentation in the Indian Contract Act

• Rescission: Rescission involves the cancellation or termination of a contract. When one party has been misled into a contract due to misrepresentation, they have the option to seek rescission. This means that the contract is voided, and the affected party can also claim damages. The primary goal of rescission is to restore the parties to their original positions before entering into the contract. For example, if a party was induced to enter a contract based on false information, rescission would allow them to step away from the contract and be compensated for any losses incurred.
• Performance: In cases of misrepresentation, the affected party can demand that the party responsible for the misrepresentation fulfills their contractual obligations as initially agreed upon. This ensures that the terms of the contract are met according to the original agreement, despite the presence of the misrepresentation. For instance, if a seller misrepresented the condition of a product to a buyer, the buyer can demand that the seller delivers the product in the promised condition.

It is crucial to understand that the remedies available for misrepresentation in the Indian Contract Act are designed to provide relief to the party that has suffered due to the misrepresentation. These remedies offer the affected party the choice to either cancel the contract or enforce the original terms, depending on the circumstances of the misrepresentation.

Limitations Available to Remedies

• Contracts can contain clauses that restrict available remedies for misrepresentation claims.
• These clauses limit misrepresentation remedies to those for breach of contract, excluding rescission rights.
• Agreement to limit misrepresentation consequences can protect the representing party.
• Enforceability of such clauses varies by jurisdiction and case specifics.

Misrepresentation and Fraud under Contract Law

Misrepresentation vs. Fraud

• Misrepresentation:
  • Occurs when a false statement is made by one party who genuinely believes it to be true.
  • No intention to deceive or mislead the other party.
  • Illustrative Example: X sells a car believing it to be in good condition, but it has undisclosed engine issues.
• Fraud:
  • Involves a deliberate false statement made with the intent to deceive the other party.
  • The person making the statement knows it is false and aims to mislead.
  • Illustrative Example: X knowingly sells a car with engine problems as being in excellent condition to deceive Y.

Key Differences

Here is a table differentiating between mistake and fraud:

Conclusion

• Misrepresentation involves providing false information that influences a party's consent to enter a contract. When consent is affected by misrepresentation, it is not considered freely given. Consequently, the contract becomes voidable, allowing the innocent party to either affirm or rescind it.
• Misrepresentation can manifest as positive assertions or statements, but the crucial aspect is the falsity of the information presented. It is intended to deceive or persuade the other party into contract formation and must occur before the contract's finalization.