DR.

RAM MANOHAR LOHIYA NATIONAL LAW

UNIVERSITY,LUCKNOW
PROJECT WORK

FOR– CONTRACTS

(SESSION 2023-24)

ON THE TOPIC-

Under what circumstances the duty to disclose

material facts will arise.

SUBMITTED TO: SUBMITTED BY:

Dr. PRIYA ANURAGINI MUSHARRAF ALI

Enroll no- 230101095

ASSISTANT PROF. (LAW) SEM. II (B.A. LL.B(HONS.))

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ACKNOWLEDGEMENT
I express my gratitude and deep regards to my teacher Dr Priya Anuragini for giving me such
a challenging topic and also for her exemplary guidance, monitoring and constant
encouragement throughout the course of this thesis.

I also take this opportunity to express a deep sense of gratitude to my seniors in the college
for their cordial support, valuable information and guidance, which helped me in completing
this task through various stages.

I am obliged to the staff members of the Madhu Limaye Library, for the timely and valuable
information provided by them in their respective fields. I am grateful for their cooperation
during the period of my assignment.

Lastly, I thank almighty, my family and friends for their constant encouragement without
which this assignment would not have been possible.

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 INDEX

1. Introduction…………………………………………………………….4
2. Misrepresentation………………………………………………………5
3. Suppression of vital facts………………………………………………6
4. Suppression of Material Facts………………………………………….7
5. Cases Under which duty to disclose Material Facts will arise…………8
6. Relationship between Bailor and Bailee………………………………..12
7. Fraud…………………………………………………………………….13

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 Introduction
The duty to disclose material facts arises always when the party knows that on the very fact
the proceeding of contractual formalities might be rendered as there might arouse various
doubts in the mind of the interested party after the particular fact is disclosed. The duty to
disclose material facts arises when the proposing party has to avoid certain charges upon him
such as of the fraud and misrepresentation which might lead the contract to be termed void on
the choice of the other party or to avoid the payment of certain damages. Disclosure of
material facts also arises in the contract with the banks and also the contract of insaurance as
contract of insurance are contract of utmost good faith.1It is usually asserted that there is no
general duty to disclose material facts to another party to a proposed contract. Thus, in a
passage often cited, chief justice Cockburn said, in 1871, that a buyer of land would not be
bound to disclose the seller the presence of valuable mineral deposit under the land.2

Nevertheless, the law is more complex than this statement suggests and, by a variety of
techniques not always thought of in this context, law does impose duties of disclosure or their
practical equivalent, in many cases.3

All the factors related to no disclosure of material factors have been discussed belowin the
light of the Indian Contract Act 1872.

1
Consequences of Non-Disclosure in the Contract of Insurance Ms. Nargis Yeasmeen, IOSR Journal of Business
and Management (IOSR-JBM) e-ISSN: 2278-487X, p-ISSN: 2319-7668. Volume 17, Issue 6.Ver. III (June. 2015),
PP 29-36
2
Smith v. Hughes(1871), L.R. 6Q.B.997 at p. 604
3
Precontractual duties of Disclosure- S.M. Waddamst

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1-Misrepresentation
A contract the consent to which is induced by misrepresentation is voidable
at the option of the deceived party.Misrepresentation means misstatement of
a fact material to the contract.It is defined in Section 18.
Section 184– Misrepresentation means and includes –
 The positive assertion, in a manner not warranted by the information
of the person making it, of thet which is not true, though he believes it
to be true.
 Any breach of duty which, without an intent to deceive, gains an
advantage to the person committing it,or any one claiming under
him,by misleading another too his prejudice, or to the prejudice of any
one claiming under hm.
 Causing, however innocently, a party to an agreement, to make a
mistake as to the substance of the thing which is subject of the
agreement.

A fact is said to be material if it would affect the judgement of a reasonable

person in deciding whether to enter into the contract and, if so, on what terms.

Types of Misrepresentation

a) Unwaranted Statements

When a person positively asserts that a fact is true when his information does not warrant
it to be so, though he believes it to be true, this is misrepresenation.
In a Bombay Case5 for example:
The defendants chartered a ship from the plaintiffs, who stated that the ship was certainly
not more than 2800 tonnage register. As a matter of fact the ship had never been in
Bombay and was wholly unknown to the plaintiffs.She turned out to be of the registered
tonnageof more than 3000 tonnes.
It was held that the defendants were entitled to avoid the charterparty. ―There was the
positive assertion by the plaintiffs abot the size of the ship – an assertion not warranted by
any information the plaintiff had at the time, and which was not true.‖6

4
INDIAN CONTRACT 1872
5
Oceanic Steam Navigation Co v SoonderdasDharamsey,ILR (1890) 14 Bom 241.
6
PARSONS J at p. 248 Contrast this with Howard marine and Dredging Co ltd v Ogden and Sons

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b) Breach of Duty

Any breach of duty which brings an advantage to the person committing it by misleading
the other to his prejudice is a misrepresentation. ―This clause is probably intended to meet
all those cases which are called in the court of equity – cases of ‗constructive fraud‘,in
which there is no intention ot deceive, but where the circumstances are such as to make
the party who derives a benefit from the transaction equally answerable in effect as if he
had been actuated by motives of fraud or deceit.‖7In that case for example:
The plaintiff having no time to read the contents of a deed, signed it as he was given the
impression by the defendant that it contained nothing but formal matters already settled
between them. The deed however contained a release in favour of the defendants.
Accordingly, the plaintiff was allowed to set aside the deed. ―The defendant,‖ the court
said, ―was under no abligation, legally or morally, to communicate the contents of the
deed, But the plaintiff palced confidence, It then became his duty to state fully without
concealment, all that wseassential to a knowledge of the contents of a document.‖

c) Inducing mistake about subject-matter

Causing however innocently , a party to an agreement to make a mistake as to the substance

of the thing which is the subject of the agreement is also misrepresentation.

The subject matter of every agreement is supposed by the parties to possess certain value or
quality. If one of the parties leads the other, however innocently, to make a mistake as to the
nature or quality of the subject matter there is misrepresentation.Foreaxmple,in a Bombay
case:8

The directory of a company while whithin their authority sold on the company‘s behalf a bill
of exchange to a bank. The Company denied liability on the bill.

But the bank was held entitled to recover the amount of the bill from the company as money
received to the use of the bank. ―The bill was different from what it was expressly
represented to be by the agents of the company.‖

 Suppression of Vital facts

Misrepresentation may also arise from suppression of vital facts. Cases of concealment or
suppression will fall either under sub-section (2), when it amounts to a breach of duty or
under sub – section (3) when it leads the other party to make a mistake about the subject

(Excavations) Ltd, 1978 QB 574: (1978) 2 WLR 515(CA) where the seller of the barges were convinced about
tehir dead weight capacity having seenit in the Lloyd’s register and , therefore, they were not held guilty of
misrepresentation though Lloyd entries were found to be wrong.
7
Oriental Bank Corporation v John Fleming, ILR (1879) 3 Bom242,per SARGENT LJ at p. 287.
8
Nursey Spg and Wug Co Ltd, re,ILR (1880) 5 BOM 92.

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matter of the agreement. For example, in R. v Kylsant,9 the prospectus of a company stated
that the company had regularly paid dividends, which created the impression that the
company was making profits whereas the truth was that the company had been running into
losses for the last several years and dividend could only be paid out of wartime accumulated
profits. The suppression of this fact was held to be a misrepresentation. Similarly, where in
the negotiations for a marriage contract, those speaking for the girl failed to disclose that she
was suffering from epileptic fits, the engagement was held to be voidable, a very material fact
having been suppressed.10

The fact that the girl was married before and was a widow at the time of free marriage was
held to be a vital fact.Its non-disclosure enable the husband to get a decree of nullity.11

 Suppression of material facts

Misrepresentation should be of facts material to the contract. Mere ―commendatory
expression‖ such as men of business will habitually make about their goods are not sufficient
to avoid the contract. In a sale of land, For example, ―a mere general statement that the land
is fertile and improvable whereas part of it had been abandoned as useless, cannot , except in
extreme cases , as for instance, where a considerable part is covered with water or otherwise
irreclaimable, be considered such a misrepresentation as to entitle a purchaser to be
discharged.‖12 But when in the sale of a hotel the tenant was described as a most desirable
tenant whereas his rent was in arrears, this was held to be a material misrepresentation.13

In the matters of Matrimony it has been held that qualifications of the spouse are a material
fact. Where the girl was in possession of high academic qualifications and agreed to
Matrimony because she was told that her match was in an attractive job whereas he was only
an apprentice in a factory, the Court ruled that it was a misrepresentation and, therefore,
annulmentof the marriage to be decreed.14 Where the fact suppressed was that the girl was
incapable of child bearing because of operation for excision of fallopian tube, this was held to
be a material misrepresentation enabling the court to pass a decree of nullity.15

9
(1932) 1KB 442.
10
Haji Ahmad Yarkhan v Abdul Ghani Khan, AIR 1937 Nag 270.
11
Asha Qureshi v Afaq Qureshi, AIR 2002 MP 263.
12
Dimmock v Hallett, (1866) LR 2 ch app 21 ,per turner LJ at p. 27
13
Smith v Land and House Property Corpn, (1884) LR 28 Ch D 7(CA).
14
Bindu Sharma v Ram Prakash Sharma, AIR 1997 All 429;Anurag Anand v Sunita Anand, AIR 1997 Del 94
15
Benjamin Doming Cardoza v Gladys Benjamin Cardoza, (1997) 3 Bom CR 553.

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Cases under which duty to disclose material facts
will arise:
 Case no.1
FACTS

The plaintiffs offered to buy the law firm of the defendants which the latter valued at 50
lakhs, per annum. However due to a problem in client dealings, there was a depreciation of
value of the firm before the conclusion of the contract which the defendants did not
communicate to the plaintiffs at the time of conclusion of contract. The plaintiffs sued for
rescission of contract.

ISSUES

Was there a duty on the part of the defendants to disclose the change in facts vis-à-vis is this
a case of negligent misrepresentation?

Was the valuation of the firm a material condition of the contract, the breach of which might
entitle the plaintiffs the right to rescind the contract?

ARGUMENTS FOR PLAINTIFFS

In the given case the plaintiffs were the offerors who offered to buy the law firm of the
defendants. The defendants valued the firm at 50 lakhs per annum which was true at that
period of time. Subsequently due to change in circumstances there was a change in the value
of firm, which the defendants being aware of, had an obligation to inform the plaintiffs. This
is because this representation made in pre-contractual negotiation is a continuing
representation.16 Any change in facts thereafter, in the time gap between such representation
and conclusion of contract, becomes a matter of supervening falsification.17

Here the defendants did not retract from their earlier statement and so their initial
representation remained in effect when the contract was entered into. The value of the firm
was an important term of the contract and thus the defendants had an onus to communicate it
properly since the plaintiffs depended upon it while making their decision. Thus, as the
defendants did not abide by their corrective responsibility to modify the statement, their
initial positive statement followed by silence thereafter created a false impression in the mind
of the plaintiffs thereby inducing them to buy the firm. ―The second clause of sec 18 is
probably intended to meet all those cases of ‗constructive fraud‘, in which there is no
intention to deceive,18 where the circumstances are such as to make the party who derives the
benefit from the transaction equally answerable in effect as if he had been actuated by

16
Smith v. Kay 7 HLC 750,769
17
J.Beatson, Anson‘s Law of Contract
18
McKendrick Ewan, Contracts Cases and Materials

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motives of fraud or deceit.‖19 Here the defendants earned benefit from such breach of their
duty of their care. Hence this amounts to negligent misrepresentation20.

ARGUMENTS FOR DEFENDANTS

In the given case, the defendants had no obligation to notify the plaintiffs of the change in the
value of the price. This is because, in case of contractual obligations, the general rule of
common law is that no person contemplating of entering into contract is under a special duty
to disclose any information to the other party.21 This rule is based upon the principle that the
parties contracting should obtain the necessary information themselves without relying upon
the other party. ―Ordinarily the failure to disclose the material fact which might influence the
mind of a prudent contractor does not give the right to avoid the contract.‖22

Also, there are certain kinds of contracts where there is a special duty of disclosure. These are
contracts made for insurance and uberrimaefidei23 where one party has a special duty to
disclose facts.24 But the contended contract does not fall under either of those two categories.
So there was no duty on the part of the defendants to inform them subsequently.

Furthermore, in the given case, the plaintiffs should have considered the contingencies
associated with valuation of firms and thereby should have confirmed it subsequently at the
time of conclusion of the contract instead of acting upon the earlier statement because
valuation of any firm is subject to changes with time. Here the rule of Caveat Emptor25applies
and thus, the plaintiffs had upon themselves the liability to act with the reasonable diligence
as that of a prudent man in order to avoid a bad bargain. ―There is not even a duty on one
party to disclose where he realizes that the other party is making a mistake about some
relevant fact.‖26

Finally, the valuation of the firm was not the sole inducer and cannot be regarded as a
material fact as there is no evidence the plaintiffs would not have bought the firm if they had
been made aware of the change in facts.

19
Oriental Bank Corporation v. Fleming (1879) 3 Bom 242,267

20
Sec 18(2) of the Indian Contract Act.
21
Anson‘s Law of Contracts, 332
22
Bell v. Lever Bros Ltd [1932] AC 161,227 (Lord Atkin)
23
Contracts of utmost good faith
24
Anson‘s Law of Contracts, 334
25
Caveat emptor means the ―buyer must beware‖
26
Smith v. Hughes (1867) LR 6 QB 597,603-4,607,610-11

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JUDGEMENT

―The general rule is that mere non-disclosure does not constitute misrepresentation and that
in the absence of a duty to speak there can be no liability in fraud however dishonest the
silence.‖27

However, in certain exceptional cases there is relief for non-disclosure. ―A person may be
held to have made misrepresentation where he fails to correct a representation which when
made was true but which subsequently to his knowledge has become false or which at the
time of making it he believed to be true but which he has subsequently discovered to be
false.‖28

Such instances are often seen when there is a time gap between the representation of facts and
the ultimate conclusion of the contract. Any change of circumstances in the meantime
affecting the fact represented must be brought to the knowledge of the other party because the
party making the representation in such cases has induced the other party to enter into the
contract on the basis of information, and this displaces the normal rule that each party takes
responsibility for acquiring information relevant to the bargain.

This rule was demonstrated by Fry J. in the case Davies v. London & Provincial Marine
Insurance Co:29

―So again if a statement has been made which is true at the time but which during the course
of negotiations becomes untrue then the person who knows it has become untrue is under an
obligation to disclose to the other the change of circumstances.‖

This is because representations made on the course of pre-contractual negotiations are held to
be continuing.30

In such cases, the representation is treated as a continuing representation (which therefore

becomes a misrepresentation at the critical time when the contract is entered into) unless the
representor discloses the change in circumstances to the other party.

This was best explained in Cramaso LLP v. Ogilvie-Grant, Earl of Seafield and Others:31

―The law is thus capable, in appropriate circumstances, of imposing a continuing

responsibility upon the maker of a pre-contractual representations in situations where there is
an interval of time between the making of the representation and the conclusion of a contract
in reliance upon it, on the basis that, where the representation has a continuing effect, the
representor has a continuing responsibility in response of its accuracy.‖

27
HIH Casualty and General Insurance Ltd v. Chase Manhattan Banks [2001] EWCA Civ 1250
28
Ewan McKendrick, 595
29
(1878) 8 Ch D 469
30
Smith v. Kay 7 HLC 750,769
31
[2014] UKSC 9

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Therefore, in the given case, the defendants were bound by the duty to disclose a change in
the value of the firm failing which their initial representation gives cause to an action for
negligent misrepresentation.

It was contended that the plaintiffs should have applied their own investigating skills to
determine the validity of facts. ―The mere fact that the misled party had the opportunity of
investigating and ascertaining whether the representation is true or false will not necessarily
deprive that person of the right to claim to have been deceived by it and therefore to avoid the
contract .‖32

It was further contended that the representation made with regards to the valuation of the firm
was not the sole factor inducing the plaintiffs to contract and that it does not constitute a
material term to the contract. However it is immaterial if it played the sole inducing as long
as has a substantive effect. ―A representation must form the material inducement to the party
to whom it is addressed, although it need only be an inducement for the party to enter into the
contract, not the sole or predominant or decisive inducement.‖33Also, in this case the value of
the firm‘s dealings was a significant factor too as it impacted the decision of the plaintiffs and
induced them to buy the firm. Thus it can be classed a material term of the contract34, the
breach of which gives the plaintiffs the right to rescind the contract.

Hence it is held that the defendants made a breach of their duty of care which amounted to
negligent misrepresentation.

Therefore, the judgment is passed in favor of the plaintiffs and the contract is set aside.

 Case no. 2

Nottingham Brick & Tile Co v Butler (1889)

The buyer of land asked the seller's solicitor if there were any restrictive covenants on the
land and the solicitor said he did not know of any. He did not say that he had not bothered to
read the documents. The court held that even though the statement was literally true it was a
misrepresentation. There were restrictive covenants and the contract could be rescinded.

32
Central Ry Co of Venezuela v. Kisch (1867) LR 2 Hl 99,120
33
Attwood v. Small (1838) 6 CL & Fin 232,502

34
Bannerman v. White (1861) 10 CBNS 844

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2- Relationship between Bailor and Bailee
According to section 15035Bailor‘s duty to disclose faults in goods bailed.—The bailor is
bound to disclose to the bailee faults in the goods bailed, of which the bailor is aware, and
which materially interfere with the use of them, or expose the bailee to extraordinary risks;
and if he does not make such disclosure, he is responsible for damage arising to the bailee
directly from such faults. If such goods are bailed for hire, the bailor is responsible for such
damage, whether he was or was not aware of the existence of such faults in the goods bailed.
Illustrations

(a) A lends a horse, which he knows to be vicious, to B. He does not disclose the fact that the
horse is vicious. The horse runs away. B is thrown and injured. A is responsible to B for
damage sustained.

(b) A hires a carriage of B. The carriage is unsafe, though B is not aware of it, and A is
injured. B is responsible to A for the injury. (b) A hire a carriage of B. The carriage is unsafe,
though B is not aware of it, and A is injured. B is responsible to A for the injury."

Now when we look at illustration (a) we can clearly see that the behaviour of the horse to be
vicious can be seen as one the material facts relevant to the completion of the contract, has it
had been notified to the buyer their decision might have changed and they wouldn‘t had
shown any interest in buying the horse but in illustration (b) as the seller was even himself
not aware about the condition of the horse thus disclosure of material fact doesn‘t come in
question but the bailor will be liable to compensate the bailee for the loss suffered. Section
150 clearly says that ―if the goods are bailed for hire, the bailor is responsible for such
damage, whether he was or was not aware of such faults in the goods bailed.‖ He has to
examine the goods and remove such defects as reasonable examination would have
disclosed.36

So it is the duty of the bailor to mention each and every material facts necessary to maintain
the good faith while bailing the goods to the bailee as even a minute detail might cause some
apprehensions in the mind of bailee and his judgement will be depending on the clear
analysis of all the details mentioned to him or her before bailing out the good from the bailor.

35
Indian Contract Act
36
Law of Contract and Specific Relief- Dr Avatar Singh

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3- Fraud
Fraud and misrepresentation can be said to be the same thing as both occur by concealment of
the fact which might be necessary for the further proceedings of the contractual obligation.
The concealment of fact might lead to some unwanted happenings to the other party as we
have seen in the cases of misrepresentation above.

‗Fraud‘ means and includes any of the following acts committed by a party to a contract, or
with his connivance, or by his agent1, with intent to deceive another party thereto or his
agent, or to induce him to enter into the contract"37

(1) the suggestion, as a fact, of that which is not true, by one who does not believe it to be
true;

(2) the active concealment of a fact by one having knowledge or belief of the fact;

(3) a promise made without any intention of performing it;

(4) any other act fitted to deceive;

(5) any such act or omission as the law specially declares to be fraudulent. Explanation- Mere
silence as to facts likely to affect the willingness of a person to enter into a contract is not
fraud, unless the circumstances of the case are such that, regard being had to them, it is the
duty of the person keeping silence to speak2, or unless his silence, is, in itself, equivalent to
speech.

Point 2 and point 5 clearly suggest about the concealment of material facts which might be
necessary in forming the contract. It becomes necessary for the proposer to mention all the
fact when he knows something and if he is asked for it else it will result into fraud.

Example-

(a) A sell, by auction, to B, a horse which A knows to be unsound. A says nothing to B about
the horse‘s unsoundness. This is not fraud in A."(Unsound mind of the horse here is the
material fact which has not been disclosed to B. Had it been told to be beforehand there wont
have been a sale procedure followed after it had come to the knowledge of the buyer.)

(b) B is A‘s daughter and has just come of age. Here the relation between the parties would
make it A‘s duty to tell B if the horse is unsound."

(c) B says to A ‗‗If you do not deny it, I shall assume that the horse is sound‖. A says
nothing. Here, A‘s silence is equivalent to speech.

(d) A and B, being traders, enter upon a contract. A has private information of a change in
prices which would affect B‘s willingness to proceed with the contract. A is not bound to
inform B."

37
Section 17 Indian Contract Act 1872

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 Conclusion

Reform of law should be proposed on the moral and economic grounds, in the
direction of requiring a general duty to disclose material facts of which a
contracting party knew or ought to have known. The difficulty with this
proposal is that it would introduce much uncertainty, especially if the dispute
happens after many years of the transaction in question. In case of dispute it
would be very difficult to determine what facts were material, what facts were
known and what facts ought to have been known at the time of transaction.

It is highly doubtful that one rule one way or the other meet the need. Some
people believe that the applicant for the employment is not bound, to disclose
the prospective employer all potential damage of the applicant‘s employment
history on the other hand the very fact might be carry out certain information
that the applicant is qualified in certain ways. This example suggest that
solution lies in the development of the existing technique.38

38
An obligation to Represent and Disclose Material Facts as a Good Faith in Life Insurance Contract-
Mohammad Khoirul Huda

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 BIBLIOGRAPHY

https://www.legalserviceindia.com/legal/article-5232-suppression-of-material-facts-and-
doctrine-of-clean-hands.html#google_vignette

https://blog.ipleaders.in/invalid-guarantees-creditors-liability-disclose/

https://www.taxmann.com/post/blog/consideration-under-the-indian-contract-act-1872

https://indiankanoon.org/doc/171398/

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