Misrepresentation in Contract Law

A misrepresentation is a false declaration of a substantial fact made by one party that influences the other party's choice under a contract law. If the misrepresentation is discovered, the contract might be deemed void, and depending on the circumstances, the adversely affected party may claim damages. In such a contract dispute, the party that committed the deception becomes the defendant, while the injured party is the plaintiff. Misrepresentation in contract law is particularly relevant in commercial operations when large transactions occur often. Misrepresentations of the value and risk associated with an agreement can result in massive financial losses for organisations and individuals, raising the risk of joint business endeavours. As a result, misrepresentation of contract law is critical for guaranteeing fairness and minimising the danger of engaging in agreements between individuals and organisations.

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This Story also Contains

1. The Meaning of the word ‘Misrepresentation’
2. How Does Misrepresentation Work?
3. Types of Misrepresentation
4. Remedies for Misrepresentation
5. The Effects of Misrepresentation
6. Misrepresentation and Fraud in Contract Law
7. Case Laws
8. Conclusion

The Meaning of the word ‘Misrepresentation’

Section 18 of the Indian Contract Act of 1872 covers the idea of misrepresentation. It defines misrepresentation as any statement made before the fulfilment of a contract. According to Section 19 of the Act, misrepresentation can render a contract unenforceable.

Statements made before the creation of a contract can be divided into two categories:

• Statements that are part of the contract.

• Statements that do not form part of the contract are considered representations.

However, the presence of misrepresentation does not always render a contract voidable. There are certain conditions:

• The contract remains lawful if the assertion might have been detected with ordinary diligence.

• If the statement does not alter the consent of the person to whom it was made, the contract is unaffected.

How Does Misrepresentation Work?

Misrepresentation is limited to assertions of fact, not views or projections. Misrepresentation is a foundation for contract violation in all transactions, regardless of size.

A vendor of a car in a private transaction may mislead the number of miles to a prospective buyer, causing the individual to acquire the vehicle. If the customer later discovers that the automobile has significantly more wear and tear than advertised, they can sue the vendor.

In higher-risk instances, a misrepresentation might be deemed a default event by a lender, such as in a credit arrangement. Meanwhile, misrepresentations might be grounds for the termination of a mergers and acquisitions (M&A) agreement, in which case a significant break fee may apply.

Types of Misrepresentation

The contract contains three sorts of misrepresentations:

Negligent misrepresentation

Negligent misrepresentation under the Misrepresentation Act 1967 (MA 1967) occurs when one contractual party makes a declaration to another carelessly or without reasonable grounds to believe it is true. The test is impersonal.

There is no duty to prove fraud. If the innocent person can prove that the statement is untrue, the producer of the statement must demonstrate that it rationally believed in the statement's veracity (that is, the representation).

A solution for negligent misrepresentation remains at common law, although its applicability in contractual settings has been significantly reduced as a result of Section 2(1) of the MA 1967.

Fraudulent misrepresentation

Fraudulent misrepresentation occurs when a false representation is made and the person making the representation, say, X, understood it was untrue or was irresponsible as to whether it was correct or incorrect--the absence of an exact belief in its reality renders it fraudulent. If A honestly thinks the statement is accurate, it cannot constitute a fraudulent misrepresentation; ignorance in making a false statement does not result in fraud. However, if it can be demonstrated that A suspected the statement to be incorrect but made no inquiries to verify the situation, that will suffice. It will not be necessary to establish a dishonest purpose.

Innocent misrepresentation

Innocent misrepresentation is a false statement of significant fact made by a defendant who was uninformed of the statement's falsity at the time the contract was signed. Rescission or contract cancellation is often the remedy in this circumstance. Consider the following scenario: a land seller notifies a buyer by mistake that planning approval has been granted for a new home development near the property. Based on information from a neighbour, the seller truly thought this to be the case.

Unfortunately, the vendor was not aware that the planning clearance had been refused. Because the buyer relied on this information when deciding to acquire the land, the seller may be held accountable for benign misrepresentation if they made a mistake.

Remedies for Misrepresentation

The remedies available for misrepresentation under the Indian Contract Act, given that it is a voidable contract entered into unknowingly by a party, are as follows:

1. Rescission: Rescission is the cancellation or termination of a contract. The injured party may pursue contract rescission and/or damages. Rescission seeks to return the parties to their pre-contractual position as much as feasible (the status quo ante).

2. Performance: Under Contract Law, the injured party can require the party that committed the misrepresentation to satisfy their contractual duties in the way originally agreed upon. It is vital to highlight that the remedies for misrepresentation are intended to offer relief to the party that has been negatively impacted by the deception, allowing them to either cancel the contract or enforce its original provisions.

The Effects of Misrepresentation

Section 19 of the Indian Contract Act provides that if permission to an agreement is acquired via deception, the aggrieved party has the right to insist on the contract's fulfilment and avoid or cancel it.

In Long v. Lloyd (1958), the defendant sold their vehicle to the plaintiff by fraudulently representing that it was in great condition. However, they identified severe flaws on the plaintiff's first trip with the vehicle. Despite this, the plaintiff accepted the defendant's offer to split half the repair costs. Unfortunately, the vehicle entirely broke down on the following voyage, prompting the plaintiff to cancel the contract.

However, the court determined that the plaintiff became aware of the deception under Contract Law during their first drive and had the option to withdraw from the contract. Because the plaintiff elected not to do so, they could not seek damages based on the misrepresentation.

Misrepresentation and Fraud in Contract Law

Fraud occurs when a false statement is made with the intent to deceive the other party. The individual making the assertion is aware it is untrue and aims to deceive the other party. This is an obvious act of deceit that entails more responsibility.

Misrepresentation, on the other hand, happens when someone makes a misleading statement yet truly thinks it to be true. There is no purpose for deceiving or misleading the opposing party. The deception is done in good faith, yet it nonetheless leads the other party into a contract based on incorrect information.

To demonstrate the distinction, consider the following examples:

In the example of fraud, X sells an automobile with an engine problem while fraudulently representing it as being in outstanding condition. X plans to mislead Y and get them to buy the automobile. This is an obvious example of deception.

In the event of deception, X truly feels the automobile is in good condition and makes a statement to that effect. However, unbeknownst to X, the vehicle has an engine issue. X's assertion is made in good faith but may be more accurate, prompting Y to buy the automobile based on incorrect information.

Case Laws

Noorudeen and Ors. vs. Umairathu Beevi and Ors. (1998)

This is an example or illustration of a transaction that was set aside due to fraud and misrepresentation. The defendant, the plaintiff's son, received an important execution from the plaintiff, which was described as a hypothecation deed of the plaintiff's property. Not only so, but the document executed was a sale deed for the plaintiff's property by way of deception. The plaintiff was a blind guy. As a result, it was determined that the deed executed under deception was set aside.

Smith v Land and House Property Corporation (1884)

In this case, the plaintiff advertised his hotel for sale, claiming that it was left to a highly desired renter. The defendants agreed to purchase the hotel from the renter. But the tenant was insolvent. As a result, the defendants declined to sign and were sued by the plaintiff. The court of appeals ruled that the plaintiff's declaration was not just an opinion, but a reality.

Remedies: The cures for this activity are as follows:

Rescission - Under this clause, the contract is effectively unravelled and aims to put both parties back in position, and the claimant may opt to affirm the contract rather than rescind it.

Affirmation resulted in the contract's continuance. The contract cannot be withdrawn after it has been affirmed. It can occur explicitly or implicitly.

Conclusion

In summary, based on the aforementioned elements, we can determine if a contract is invalid or voidable depending on the particular facts of the case. An invalid contract cannot be enforced by both parties; on the other hand, if it is deemed voidable, it may be terminated or revoked even while it remains valid. In essence, a voidable contract may be terminated by any party at any time, whereas a void contract cannot be carried out. If a contract contains a mistake or misrepresentation, it may be deemed void and annulled. The contract may be voidable and so subject to cancellation if there has been duress or improper influence.

Misrepresentation is defined as making a misleading statement of fact to entice the parties to engage in a contract. Consent gained by deception is not regarded as freely given. As a result, the contract is voidable, which means that the innocent party has the option of affirming or rescinding the contract based on the misrepresentation under the Indian Contract Act. Misrepresentation can take the shape of positive claims or declarations, but the main need is a misleading representation of a fact. The statement of misrepresentation is intended to deceive or encourage the other party to engage in the contract. The misrepresentation must occur before the contract's conclusion or finalisation.