The Consequences of Misrepresentation in Contract Law

Misrepresentation in the Law of Contract

Introduction: 

A contract is a legally binding agreement between two or more parties. In order for a contract to be valid, both parties must enter into it freely and with a full understanding of the terms and conditions. Misrepresentation is a legal term that refers to a false statement made by one party to the other, which induces them to enter into a contract.

You may also read What is free consent in the law of contract?

Misrepresentation means a misstatement of a fact material to the contract. It is a false but unintentional statement respecting a matter of fact. If the statement is made wrongly and unintentionally, it is said to be a fraud. If the consent of a party to a contract is obtained by practicing misrepresentation, the contract is voidable at the option of the party whose consent has been so obtained. 

Meaning and Definition of "Misrepresentation": 

The following definitions are helpful in comprehending the concept of misrepresentation in the context of the law of contract: 

(1) Webster's College Dictionary: 

To misrepresent means “to represent falsely; give an untrue or misleading idea of” something. 

(2) Black's Law Dictionary: 

Misrepresentation means “Any manifestation by words or other conduct by one person to another that, under the circumstances, amounts to an assertion not in accordance with the facts.” 

(3) Section 18, Contract Act: 

According to Sec. 18. “Misrepresentation m means and includes: 

Misrepresentation is a false statement of fact that is made by one party to another, which induces them to enter into a contract. The statement must be material, meaning it must be important enough to affect the other party's decision to enter into the contract. Misrepresentation can be made intentionally or unintentionally and can be made by words or by conduct.

Types of Misrepresentation:

There are three types of misrepresentation: innocent misrepresentation, negligent misrepresentation, and fraudulent misrepresentation.

Innocent misrepresentation occurs when a party makes a false statement without knowing it is false. They are not liable for any damages suffered by the other party as a result of the statement.

Negligent misrepresentation occurs when a party makes a false statement without taking reasonable care to ensure that it is true. They are liable for any damages suffered by the other party as a result of the statement.

Fraudulent misrepresentation is the most serious type of misrepresentation. It occurs when a party makes a false statement knowing it is false, or without caring whether it is true or false. They are liable for any damages suffered by the other party as a result of the statement, and may also be subject to criminal charges. We already discussed it in a detailed article What is Fraud in the law of Contract

Fraud by Misrepresentation:

A person is held to have committed fraud by Misrepresentation if he dishonestly makes a false representation and intends by that Misrepresentation to, (a) make a gain for himself, or (b) to cause a loss to another or to expose another to the risk of loss. Representation is held to be false if, (a) it is untrue or misleading, and (b) the person making it knows that it is, or might be untrue or misleading.

Acts amounting to "misrepresentation": 

Misrepresentation occurs in the following cases: 

(1) Positive Statement of Facts: 

When a person positively asserts a fact as true when his information doesn’t warrant it to be so though he believes it to be true. 

Illustration: 

A says to B that his horse can run 10 km. at a stretch and induces B to buy his horse. It turns out that the horse is only able to run 3 km. A is guilty of misrepresentation

(2) Unjustified Statement: 

When a person makes a clear statement of facts, about the contract, without any reasonable justification believing it to be true, though it is not true, there is a misrepresentation.  Misrepresentation should be of facts essential to the contract. A mere expression of opinion cannot be called misrepresentation. 

Illustrations: 

(a) A says to B who wants to purchase his land, “My land produces 40 maunds of wheat per acre.” A believes the statement to be true, although he did not have sufficient grounds for the belief. Later on, it appears that the land produces only 10 maunds of wheat per acre. This is a misrepresentation. 

(b) In Sheffield Nickel Co. vs Unvin, A the owner of a gold mine sold the mine to M. During the preliminary discussion A had made certain statements about the mine which were incorrect, though A honestly believed it to be true. After having worked for 6 months M discovered the true position. There is a misrepresentation. 

(3) Breach of Duty: 

Any breach of duty which brings an advantage to the person committing it by misleading the other to his prejudice.  Clause (2), Section 18 covers those cases where a statement when made was true but subsequently before it was acted upon, it becomes false to the knowledge of the person making it. In such a case, the person who makes such statements must inform the other party about the change, otherwise, he will be guilty of misrepresentation. 

Illustrations: 

(a)  In an insurance proposal form, A states his age as 27 years believing it to be true. The actual age is 29 years. The L.I.C. issues a policy and charges a lower rate of premium than it would have charged at an actual age. There is a misrepresentation. 

(b) A, before signing a contract with B for the sale of a business, correctly states that the monthly sales are Rs. 50,000. Negotiations lasted for five months when the contract of sale was signed. During this period the sales decreased to Rs. 5000 a month. A unintentionally keeps quiet. It was held that there was misrepresentation and B was entitled to avoid the contract.

(4) Mistake about subject matter: 

The parties to the contract expect that the subject matter of the agreement possesses a certain value or quality. If one of the parties induces the ‘other, though innocently, to commit a mistake about the nature and quality of the subject matter, there is a misrepresentation. 

Illustrations: 

(a) In the Oceanic Steam Navigation Co. vs. S. Dharamsey, S chartered a ship as being of not more than 2800 registered tonnage. It turned out that the registered tonnage was 3045 tonnes. It was held that S was entitled to avoid the contract, as the erroneous statement regarding the tonnage was a misrepresentation. There was a mistake as to the substance of the agreement. {[(1890) 14 Bom. 291] 

(b) In a contract of sale of a motorcycle the seller made a representation that it is free from defects. But in fact, there was an inherent defect in the motorcycle. The buyer due to a mistake purchased the motorcycle. There is a misrepresentation. 

Essential Elements of "Misrepresentation": 

The following elements must be proved in order to establish the plea of misrepresentation. 

(1) Innocence: 

The representation or statement must be made innocently and believing it to be true. 

(2) Relation to Material Facts: 

Misrepresentation should be of facts material to the contract. Mere, “puffing expressions” such as men of business usually make about their goods are not sufficient to avoid the contract. For example, “My goods are as good as that of B’s” is a commendatory statement providing no chance for the purchaser to avoid the contract.

Illustration:

In Mohanlal vs. S.G. Cotton Mills Co., A told B that one C could be the director of a company.  A, obtained this information not from C directly, but from another person D. Acting on A’s information, B subscribed for shares in the company C did not become the director. Held, there was a misrepresentation. 

(3) Inducement:

Again, the misrepresentation must be the cause of the consent otherwise the consenting party cannot avoid the contract. 

(4) Intention that It shall be acted upon: 

The representation must be made with the intention that it shall be acted upon by the other party. A party cannot complain of misrepresentation if, he had the means of discovering the truth with ordinary prudence. 

Effects of Misrepresentation: 

If a contract is entered into as a result of misrepresentation, the party who was misled may have several options.

They may:

Rescind the contract:

This means that the contract is canceled, and both parties are put back in the position they were in before the contract was made.

Claim damages:

This means that the party who was misled can claim compensation for any losses they suffered as a result of the contract only in case of fraudulent misrepresentation.

Affirm the contract:

This means that the party who was misled decides to continue with the contract, despite the misrepresentation.

Examples of Misrepresentation:

• A seller tells a buyer that a car has a full-service history, when in fact the car has been in a major accident. This is a fraudulent misrepresentation, as the seller knew the statement was false.
• A landlord tells a tenant that the apartment is in a safe neighborhood, when in fact the area has a high crime rate. This is a negligent misrepresentation, as the landlord should have known that the statement was false.
• A real estate agent tells a prospective buyer that a property is structurally sound, when in fact the property has serious foundation issues. This is an innocent misrepresentation, as the agent genuinely believed the statement to be true.

Fraud, Misrepresentation and Collusion

"An intentional perversion of truth for the purpose of inducing another in reliance upon it to part with some valuable thing belonging to him or to surrender a legal right. A false representation of a matter of fact, whether by words or by conduct, by false or misleading allegations, or by concealment of that which should have been disclosed, which deceives and is intended to deceive another so that he shall act upon it to his legal injury. 

Anything calculated to deceive, whether by a single act or combination, or by suppression of truth, or suggestion of what is false, whether it be by direct falsehood or innuendo, by speech or silence, word of mouth, or look or gesture. A generic term, embracing all multifarious means that human ingenuity can devise, and which are resorted to be one individual to get an advantage over another by false suggestions or by suppression of truth, and includes all surprise, trick, cunning, dissembling, and any unfair way by which another is cheated". It is a settled proposition of law that fraud cannot be directly proved; it has to be inferred from the surrounding circumstances and conduct of the parties. It is also well-settled law that fraud vitiates the most solemn proceedings.

Anything calculated to deceive another to his prejudice and accomplish the purpose, whether it be an act, a word, silence, the suppression of truth, or other devices contrary to the plain rules, of common honesty. In the same context, the term "misrepresentation" has been defined as " the statement of untruth."

Any manifestation by words or other conduct by one person to another that, under the circumstances, amounts to an assertion not in accordance with the facts. An untrue statement of fact. An incorrect or false representation. That which, if accepted, leads the mind to an apprehension of a condition other and different from that which exists. Colloquially it is understood to mean a statement made to deceive or mislead. (Blacks Law Dictionary Fifth Edition).

An agreement between two or more persons to defraud a person of his rights by the forum of law, or to obtain an object forbidden by law. It implies the existence of fraud of some kind, the employment of fraudulent means or of lawful means for the accomplishment of an unlawful purpose." (Blacks Law Dictionary Fifth Edition).

Difference between Fraud and Misrepresentation:

1. Intention.

Misrepresentation is innocent or intentional. Fraud is a willful and intentional misrepresentation, 

2. Rescission and damage.

In misrepresentation, the aggrieved party can rescind the contract or sue for restitution. In fraud, the remedy available is not only rescission but claims for damages too.

3. Where truth can be discovered with ordinary diligence.

In misrepresentation, the aggrieved party can’t avoid it if it should discover the truth by ordinary diligence, But in case of fraud, the contract is voidable at the option of the aggrieved party even though it had the means of discovering the truth by ordinary diligence. 

4. Knowledge.

If there is a lack of knowledge about the defects or one party has no knowledge about the main defects there we can say is a misrepresentation. But if someone has knowledge of facts there is fraud.

Conclusion

Misrepresentation is a serious issue in the law of contract, as it can have a significant impact on the parties involved. It is important for individuals and businesses to be aware of the different types of misrepresentation and the legal options available if they are the victim of a false statement. By understanding the basics of misrepresentation, individuals and businesses can take steps to protect themselves and make informed decisions when entering into contracts.