Professional Documents
Culture Documents
UNIVERSITY
Project Report
On
(Contracts)
3. Introduction 7
4. What Constitute a Misrepresentation 8-9
5. Innocent Misrepresentation 10-14
a) Remedies for Innocent Misrepresentation
Case Laws:
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ACKNOWLEDGEMENT
The present project on the”Innocent and Negligent Misrepresentation” has been able to get
its final shape with the support and help of people from various quarters. My sincere thanks
go to all the members without whom the study could not have come to its present state. I am
proud to acknowledge gratitude to the individuals during my study and without whom the
study may not be completed. I have taken this opportunity to thank those who genuinely
helped me. With immense pleasure, I express my deepest sense of gratitude to Mrs.Sushmita
Singh Faculty for Contract Law, Chanakya National Law University for helping me in my
project. I am also thankful to the whole Chanakya National Law University family that
provided me all the material I required for the project. Not to forget thanking to my parents
without the co-operation of which completion of this project would not had been possible. I
have made every effort to acknowledge credits, but I apologies in advance for any omission
that may have inadvertently taken place. Last but not least I would like to thank Almighty
whose blessing helped me to complete the project.
Stream : B.A.LLB
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DECLARATION BY THE CANDIDATE
I hereby declare that the work reported in the B.A.LL.B (Hons.) Project Report
“Innocent and Negligent Misrepresentation” submitted at Chanakya
National Law University is an authentic record. I have not submitted this work
elsewhere for any other degree or diploma. I am fully responsible for the
contents of my Project Report.
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RESEARCH METHODOLOGY
Method of Research
The researcher has adopted a purely doctrinal method of research. The researcher has made
extensive use of the library at the Chanakya National Law University and also the internet
sources.
Sources of Data
The following secondary sources of data have been used in the project
1. Cases
2. Books
3. Internet
Method of Writing
The method of writing followed in the course of this research paper is primarily analytical.
Research Question
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INTRODUCTION
What is misrepresentation?
1
BLACK’S LAW DICTIONARY, 903 (5thedn., 1979)
2
Section 18, INDIAN CONTRACT ACT, 1872
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Under the Law of Contracts, a contract, the consent to which is
induced by misrepresentation is voidable3 at the option of the
deceived party. The other remedy which the party deceived may
claim is that he may seek the enforcement of the contract in the
manner in which it would have been executed had the
representation made to him been true.4Thus we may say, that
misrepresentation means a misstatement of a fact or facts,
which are material5 to the contract.6 Misrepresentation has been
considered as one of the grounds of rendering contracts
voidable since, one of the basic principles of Law of Contracts
is the parties to the contracts must have entered it by free
consent, and thus, it is essential that the parties have accurate
knowledge of any such fact which may be material to the
contract. The exception to this being that if such consent had
been obtained by a misrepresentation, the contract is
nevertheless not voidable, if the party whose consent was so
caused had the means of discovering the truth with ordinary
diligence.7 A misrepresentation which did not cause the
consent to a contract of the party, on whom such a
misrepresentation was made, does not render the contract
voidable.8
What is also noteworthy is that in case of a misrepresentation, the party misled will not be
entitled to claim damages for breach of contract, for no contractual stipulation has been
broken; but he will be able to claim any of the two remedies mentioned above.
3
A voidable contract can be legally rejected by one party and is said to have a defect. If the party with the power
to reject the contract chooses not to reject the contract despite the defect, the contract becomes valid and
enforceable.
4
Misrepresentation and Mistake, available at http://www.lexuniverse.com/contract-law/india/Misrepresentation-
and-Mistake.html (Last visited on December 26, 2012)
5
A material fact is an occurrence, event, or information that is sufficiently significant to influence an individual
into acting in a certain way, such as entering into a contract.
6 Pollock, and Mullah, THE INDIAN CONTRACT ACT AND SPECIFIC RELIEF ACTS, Vol. 1, 401 (NilimaBhadbhade
ed., 14th edn., 2012)
7 Section 19, INDIAN CONTRACT ACT, 1872
8Mullah, Supra note 5, at 458
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A misrepresentation must be a positive assertion of a fact, which is not warranted by the
information of the party. Also, such a statement must not be a mere opinion, or hearsay, or a
commendatory expression. There must be a representation, and in case of mere silence, it
must be under circumstances where there is a duty to speak.
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What constitute a misrepresentation?
The representation must be addressed to the party misled. In Peek v. Gurney, the promoters
of a company were sued by the appellant who had purchased shares on the faith of false
statements contained in the prospectus issued by them. The appellant was not the person to
whom the shares had been allotted on the first formation of the company; he had merely
purchased these shares from those to whom the shares had been allotted. The House of Lords
held that the prospectus was only issued to the first applicants for shares; that it could not be
supposed to extend to any other person than these; and that on the allotment, the prospectus
had done its work; it was exhausted.10
The representation must form a real inducement to the party to whom it is addressed, and
whether or not a person who has entered into the contract was induced to do so by the
particular representation is in each case a question of fact. 11 The burden of proving that he
was induced to enter into the contract by the representation rests upon the party misled.12
9
Laurence Koffman, Elizabeth Macdonald, THE LAW OF CONTRACT, 319 (7thedn., 2010)
10
Peek v. Gurney ,(1873) 6 HL 377 (House of Lords)
11 A question of fact is a factual dispute between litigants that must be resolved by the jury at trial. It is an issue
that is material to the outcome of the case and requires an interpretation of conflicting views on the factual
circumstances surrounding the case.
12
Arkwright v. Newbold (1880) 17 Ch. D 301
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On the other hand, a person cannot be said to have been induced to enter the contract by a
representation which, though false, did not actually influence him. The representation may
have been immaterial, that is, it did not influence the party’s mind, or affect his judgement or
he may never have become aware, until after the conclusion of the contract, that a
representation had been made. For example in Horsfall v. Thomas, the plaintiff had bought a
cannon, which had been manufactured by the defendant. The cannon had a defect which
made it worthless, and the defendant had attempted to conceal this defect by inserting a metal
plug into the weak spot in the gun. The plaintiff never inspected the cannon, he accepted it as
it is, and on using it, the cannon burst. It was held in this case that the attempted concealment
having had no effect on his mind or conduct, and thus, no valid claim lied. 13
The mere fact that the party misled had the opportunity for inspecting whether the
representation was true or false will not necessarily deprive him of his right to claim that he
was deceived by it.14 But in case that he does investigate, and consequently, does rely upon
his own investigation and not the representation that has been made to him by the other party,
then his claim that he has been misled is highly likely to fail, as it can no longer be said that
the representation made to him was the cause for his entering into the contract.15
13
Horsfall v. Thomas, (1862) 158 ER 813
14
Central Ry. Co. of Venezuela v. Kisch, (1867) L.R. 2 H.L 99 (House of Lords)
15
Attwood v. Small, (1838) 6 Cl. & Fin. 232
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Types of Misrepresentation
Once it has been established that there has been a misrepresentation, the next step is to
inquire into the state of mind of the party making the misrepresentation. As has been already
stated, the general effect of misrepresentation is to render the contract voidable at the option
of the party misled.
A fraudulent misrepresentation not only invalidates a contract in this manner, but also
gives rise to an action for damages in respect of the deceit. If, therefore, the
misrepresentation was made to the party fraudulently, the injured party is entitled to recover
any losses which he may have incurred as a result of this misrepresentation. 16 What is also
important to note is that a negligent misrepresentation does not amount to fraud, as was
highlighted in the Derry v. Peek case, although gross negligence may amount to deceit.
What is essential is the absence of any belief in the truth of the statement. And the motive of
the person making the statement is irrelevant.17
Before the advent of a remedy in damages for negligent misrepresentation, all contractual
misrepresentations which merely induced the formation of a contract could be divided into
two categories: first, misrepresentations which were fraudulent and second,
misrepresentations which were innocent.18 Here we are going to focus on Innocent and
Negligent Misrepresentation
16
Mullah, Supra note 6, at 426
17
Derry v. Peek, (1889) 5 L.T.R 625
18
Anson, Supra note 9, at 221
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What Is Innocent Misrepresentation?
It will depend on the law of the state where the misrepresentation occurred. However, there
are five basic elements that must be satisfied to prove innocent misrepresentation:
Someone must make a false representation that must be false at the time of the
transaction, and remain false.
The misrepresentation is "material to the transaction," which means it must be
about an important element of the transaction at hand. For example, if someone is
selling a car and they say that it has 15,000 miles on it when it actually has 15,124
miles; the misrepresentation would like not be material. By contrast, 150,000 would
be.
The other party must substantially rely on the misrepresentation, meaning if the
other party knew, they would not go through with the transaction. If the buyer, for
instance, would have bought the item regardless of what was said about it, the
misrepresentation may not count. They must substantially rely on the falsehood.
The lie must also proximately cause the other party to suffer damages, or in other
words, the buyer must be actually harmed by the final transaction in order to sue, such
as economic damages suffered by the American corn farmers who are unable to sell
corn grown from seeds that they purchased from Syngenta.
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In addition to those four elements, which are necessary for negligent and fraudulent
misrepresentation as well, there is a fifth element that is unique to innocent
misrepresentation.
The loss of the one party must benefit the other. This is an odd and very vague
requirement, but one that the courts have held up nonetheless. Essentially, if the
misrepresentation made does not benefit the person who made it, or hurts both parties
to the contract, then the courts will not consider it a case of misrepresentation.
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Remedies for Innocent Misrepresentation
Misrepresentations are civil offenses, meaning they can only be heard in civil court. The
criminal equivalent, which requires a degree of intent, is called "false pretenses." The
general remedy in civil court for all types of misrepresentations is rescission.
This means the court will act like the transaction or contract never existed, and everyone goes
back to the way they were. Although money damages are possible, they are less likely in a
case of innocent misrepresentation, unless rescission is not available as a remedy (perhaps
because one party has already substantially carried out their part of the contract).
Example: Ram sell someone a stereo for $50 telling them that it is fully functional, which
Joe thinks is true, and it turns out to be broken. The deal is rescinded; the buyer returns the
stereo and Joe returns the money.
The plaintiff was a haulage contractor who saw an advert for the sale of a lorry which was
described as in ‘exceptional condition’. The plaintiff saw the vehicle the following day and
the defendant stated that the lorry could drive at 40mph. Also, during a test drive, the
defendant stated that the vehicle did 11 miles to the gallon. The plaintiff noticed defects on
the vehicle and purchased the vehicle for a reduced price, paying half of the cost that day.
Two days later, the plaintiff drove the vehicle and discovered serious issues and that the
petrol tank was 8 miles to the gallon, rather than 11 and told the defendant. Following this,
19
Leaf v International Galleries – 1950' (Lawteacher.net, February 2019)
<https://www.lawteacher.net/cases/leaf-v-international-galleries.php?vref=1> accessed 12 February 2019
20
'Long v Lloyd – 1958' (Lawteacher.net, February 2019) <https://www.lawteacher.net/cases/long-v-
lloyd.php?vref=1> accessed 12 February 2019
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the plaintiff allowed his brother to take the lorry on a business trip where it again had broken
down. The plaintiff brought an action to rescind the contract on the basis of innocent
misrepresentation. The court rejected the claim of the plaintiff. It was held that innocent
misrepresentation allowed the plaintiff to rescind after the contract had been executed, but
that the plaintiff would lose such a right after the goods had been accepted. In sending the
lorry on the business trip with his brother, the plaintiff had construed final acceptance of the
vehicle and had therefore lost the right to rescind the agreement.
In the prospectus released by the defendant company, it was stated that the company was
permitted to use trams that were powered by steam, rather than by horses. In reality, the
company did not possess such a right as this had to be approved by a Board of Trade. Gaining
the approval for such a claim from the Board was considered a formality in such
circumstances and the claim was put forward in the prospectus with this information in mind.
However, the claim of the company for this right was later refused by the Board. The
individuals who had purchased a stake in the business, upon reliance on the statement,
brought a claim for deceit against the defendant’s business after it became liquidated. The
claim of the shareholders was rejected by the House of Lords. The court held that it was not
proven by the shareholders that the director of the company was dishonest in his belief. The
court defined fraudulent misrepresentation as a statement known to be false or a statement
made recklessly or carelessly as to the truth of the statement. On this basis, the plaintiff could
not claim against the defendant company for deceit.
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What is Negligent Misrepresentation?
Example: A real estate broker tries to sell a house to a buyer, who stresses his need for peace
and quiet. The broker promises that the house is very quiet. In reality, the house next door is
undergoing a very noisy reconstruction. Although the broker did not know this, her promise
that the house was quiet was made without her having any reason to believe that that was the
case. She simply assumed it. This would be a negligent misrepresentation (had she known
about the construction and lied about it, however, that would be a much more serious
fraudulent misrepresentation).
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must also rely partly (or in many courts, wholly), on the misrepresentation in deciding
to go ahead with the transaction.
5. As a result of the reliance on the misrepresentation, the other party suffered
damages. This means the buyer must be actually harmed by the final transaction,
otherwise there is no liability.
There is an important distinction to be made here, however. The more serious variety of
misrepresentation (fraudulent misrepresentation, or fraud), has nearly identical elements, so
the line between the two is very fine. The only difference is that fraudulent misrepresentation
requires “reckless disregard” as to the truth of something”, while negligent disregard only
requires “no reasonable ground” to assume something is true. It is essentially a matter of
degree. So in the real estate broker example, for instance, it was not a reckless disregard for
the truth to say the house was quiet, since many homes may be considered so, even if it was
negligent of her as a broker to discover this fact before making any claims.
But if the buyer had said “I am deathly allergic to common pine wood, is there any pine wood
in this house?” and she had responded “no, not at all” when in fact she has no idea what kind
of wood the house is made of, then this would be a reckless disregard for the truth of
something, especially considering the possibly consequences.
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Negligent Misrepresentation and Negligent Misstatement
21
https://www.darlingtons.com/blog/negligent-misstatement
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or a disclaimer is issued. You would need to check with your solicitor to see whether these
are valid exclusions or not.
It is also important to consider prior to bringing a claim any other terms that might be
included in the contract such as a mediation clause preventing bringing a claim prior to
attempting mediation and also to ensure that you comply with any applicable time limits and
jurisdictions for bringing a claim.
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What are the Defences to Negligent Misrepresentation?
There are certain defences which the defendant can use when they are being sued for
negligent misrepresentation such as:
Contributory Negligence: The defendant can claim that the plaintiff was also
negligent and they were also responsible for the damages which they incurred. For
example, when signing up to purchase a product or service, the plaintiff may have had
an opportunity to verify whether or not the defendant’s claim was true but chose not
to do so.
o In a jurisdiction which allows this defense, if the plaintiff was found to have
also been negligent, then the plaintiff would not be able to recover any money
from the defendant.
Comparative Negligence: In jurisdictions which have comparative negligence as a
defense, if the defendant can prove that the plaintiff was partially at fault, then the
defendant’s liability will be reduced to that extent. For example, if a plaintiff was 40%
at fault, then the plaintiff’s monetary recovery from the defendant will reduced by that
percentage.
Assumption of Risk: The defendant can claim that the plaintiff voluntarily assumed
the risk of entering into the transaction and the plaintiff was not induced or compelled
by the defendant.
Statement of Opinion Rather Than Fact: Misrepresentation claims are generally
about facts and not about opinions, even if they are false. The defendant claim that
they were merely expressing their opinion which may have turned out to be false and
that they did not make any false statement of fact to the plaintiff.
Puffery: Puffery refers to any exaggerated or extravagant statement which is made to
attract buyers to a particular product or service. It is commonly used in advertising
and marketing and it is assumed that most consumers would not take puffery literally.
o An example of puffery would be to claim that your pizza restaurant is the best
in your city. The defendant can claim that it did not make a negligent
misrepresentation to the plaintiff but was merely using a certain technique to
sell or advertise its products or services.
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Remedies for Negligent Misrepresentation
Misrepresentations are civil offenses, meaning you can only sue for them in civil court (the
criminal equivalent of these offenses is called "false pretences"). The general remedy in civil
court for all types of misrepresentations is that of rescission. This means the court will act
like the transaction or contract never existed, and everyone goes back to the way they were.
Example: You sell someone a stereo for $50 telling them that it is fully functional (which
you think is true), and it turns out to be broken. The deal is rescinded; the buyer returns the
stereo, and you return the money.
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CONCLUSION
Over the course of this project I have tried to determine what the term misrepresentation
means and if it could actually be succinctly defined. What I have also tried to look at is the
position with regard to innocent misrepresentation, since that is one issue where there is
always some doubt, since judging the state of mind is a difficult task, as said by Lord
Denning.
In the process of my research I observed that the concept of misrepresentation under the
Indian law has been evolved and has been significantly influenced by that in the Common
law. But in certain ways, it seems to lack. Over time, most legal systems have tended to
adjust their laws in such a way that they are in favour of the aggrieved party, some may have
gone too far, and some still need certain changes, but nevertheless, attempts have been made,
which is something that seems to be lacking in the Indian scenario.
In spite of this, saying that the Indian laws are a complete failure would be an exaggeration.
In the researcher’s opinion, probably the reason why the Indian laws have not been altered is
that human error and negligence needs to be accounted for in contracts, and imposing a duty
as strong as the English or the French laws would take it too far, which in any case should be
avoided, as there needs to be certain room for human error as well. Innocent
misrepresentation needs to be accounted for, since awarding damages, without looking at
whether the party had an intention to deceive or not would be a very constrained approach.
On another note, by distinguishing between fraud and misrepresentation, the India laws have
brought some clarity into the laws and the contractual liabilities of contracting parties. This is
one issue on which the India laws seem to be better than most other legal systems which lack
this distinction, as in this project, the French and the German legal systems.
Thus, we may say that there is not much scope for change in the Indian laws with respect to
misrepresentation, and they seem to fairly clear on the issue, with sufficient deterrent and
punitive measures.
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BIBLIOGRAPHY:
Books:
Refrences:
1. https://indiankanoon.org/search/?formInput=negligent%20misrepresenta
tion
2. https://www.lindberghinsurance.com/blog/business-guide-to-different-
types-of-misrepresentation/
3.
https://www.uio.no/studier/emner/jus/jus/JUS5260/v12/undervisningsmat
eriale/Misrepresentation.pdf
4. https://www.legalmatch.com/law-library/article/negligent-
misrepresentation.html
5. https://www.investopedia.com/terms/m/misrepresentation.asp
6. https://scholarship.law.campbell.edu/cgi/viewcontent.cgi?article=1328&co
ntext=clr
7. https://www.lexisnexis.com
8. https://thelawdictionary.org/article/3-types-misrepresentation-matter/
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