Contract Act 1872-Free Consent-Misrepresentation

By Asok Nadhani

5.5 Misrepresentation

a.     Representation : Any statement of fact made by the incumbent parties to enter into a contract is called Representation. When such representation is wrongly made innocently or without knowledge, it amounts to Misrepresentation.

b.    Misrepresentation:  "Misrepresentation" means and includes (sec.18):

i.      Positive assertions : When a person positively asserts that a fact as true when his information does not warrant to be so, though he believes it to be true.

ii.    Breach of duty : When there is a breach of duty by a person which brings an advantage to the person committing it by misleading another to his prejudice.

iii.   Mistake as to the substance : When a Party causes, however innocently, the other party to an agreement, to make a mistake as to the substance of the thing which is the subject of the agreement. 

c.     False statement of material fact : Thus, when a person, who is a Party to the contract, makes a false statement of material fact to the contract, which he honestly believes to be true (or does not know to be false), is called Misrepresentation. It also includes non disclosure of material fact.

Ex. A, intending to sell his cow to B, says that his (A) cow gives 15 ltr. of milk per day. B, believing the statement to be true, buys the cow from A. Later on, B discovered that the cow hardly gives 1.5 ltrs. milk a day. This is misrepresentation and the contract is voidable at the option of B. 

5.5.1 Elements of Misrepresentation

a.     Misrepresentation of material fact : It must be misrepresentation of material fact. Mere mention of something which turns out to be wrong is not misrepresentation, it must be:

i.      Wrong but the person making it believes to be true.

ii.    Made before the conclusion of contract.

iii.   Made with an intention to be acted by the person whom it is addressed to.

iv.   Actually have been acted upon and have induced the contract.

v.     Made without any intention to deceive the other party.

b.    Wrong statements made to third party : Wrong statements made to third party with an intention to be communicated to the plaintiff also amounts to misrepresentation.

5.5.2 Ways of making Misrepresentation

Misrepresentation may be made through:

a.     Unjustified statement of facts. Where a positive assertion is made by a person (e.g., a statement of facts, a claim, a declaration, a contention) who believes it to be true (but in fact not true), and the person making the assertion had no reasonable basis to make. Such an assertion amounts to misrepresentation.

b.    Misleading a person. Where a person is duty bound towards some other person, but he acts in a manner misleading the other person resulting in a breach of duty, and thereby such person makes a gain or advantages at the cost of such other person, it amounts to misrepresentation, though the breach of duty was not intended to deceive such person.

c.     Inducing others to make mistake. If a party to the contract innocently does something which causes the other party to make a mistake as to essential (i.e., material) part of the contract, the other party has acted under a misrepresentation.

5.5.3 Legal consequences of Misrepresentation

In case of misrepresentation, the aggrieved party may:

i.      Rescision of contract : Avoid or rescind the contract.

Ex. C, with the intention of inducing D to enter into a contract with him, makes a statement to D, which is in fact untrue and thereby induces D to enter into the contract in good faith, but negligently. This results in misrepresentation and the contract becomes voidable at the option of D.

ii.    Restoration to the position : Accept the contract but ask to be placed in the position where he would have placed, had the misrepresentation turned out to be true.

iii.   Right to avoid/ rescind the contract lost : However, the aggrieved party loses his right to avoid/ rescind the contract if:

a.     Benefits Taken : He, becoming aware of the misrepresentation, takes the benefit of the contract or in some way confirms it,

Ex. Sohan induced Suraj to buy his motorcycle saying that it was in good condition. After taking the motorcycle, Suraj complained that there were many defects in motorcycle. Sohan proposed to get it repaired and promised to pay 40% of the cost of repairs which Suraj agreed to. After a few days, the motor cycle did not work at all. Suraj wants to rescind the contract. Having accepted to share the cost of repair, Suraj has lost the right to rescind the contract.

b.    Restoration not possible : If the restoration to original position is not possible,

Ex. A sold his mine to B. During negotiations, A had made certain statements about the mine which were incorrect, though A honestly believed them to be true. After having worked the mine for six months B discovered the true position. B cannot rescind the contract because the parties cannot be restored to their original position.

c.   Third party Rights : If a third party has acquired right to the subject matter in good faith for value.

d.   Discovery of the truth : The party whose consent was caused by misrepresentation had enough means to discover the truth using diligence.

e.   Ignorance : He gave the consent in the ignorance of misrepresentation.

For more details, refer to Mercantile law, by Asok Nadhani, BPB Publications, www.bpbonline.com, bpbpublications@gmail.com