MISREPRESENTATION

AND
FRAUD
MISREPRESENTATION
• “Misrepresentation” means and includes—

Section (1) the positive assertion, in a manner not warranted by the information of the
person making it, of that which is not true, though he believes it to be true;
(2) 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

18
misleading another to his prejudice, or to the prejudice of any one claiming
under him;
(3) 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.

• Voidability of agreements without free consent.—

Section ➢When consent to an agreement is caused by coercion, fraud or

misrepresentation, the agreement is a contract voidable at the
option of the party whose consent was so caused.A party to

19
contract, whose consent was caused by fraud or misrepresentation,
may, if he thinks fit, insist that the contract shall be performed, and
that he shall be put in the position in which he would have been if
the representations made had been true.
ESSENTIAL ELEMENTS OF
MISREPRESENTATION
For a misrepresentation to occur, the following elements must be present:-

❖ The false representation of a fact: There must be a statement or

assertion that is untrue or misleading.
❖ Causal link to consent: The false representation must be a material
factor that influences the party’s consent.
❖ Intention to induce: The statement should be made to deceive or induce
the other party into entering the contract.
❖ Timing: The statement must be made before the contract is finalized or
concluded. Absence of deception: The statement should not be made to
deceive the other party intentionally.
ILLUSTRATIONS
■ Financial Products: A financial advisor
misrepresents the risks associated with an
investment opportunity to persuade clients to
invest, downplaying potential losses and
overstating potential gains .
■ Sales and Contracts: A car salesperson
innocently claims that a used car has never
been in an accident, when in fact it has been in
a major collision and repaired extensively. This
misrepresentation influences the buyer's
decision and could lead to legal disputes if
discovered later.
TYPES OF MISREPRESENTATION

❑ Unwarranted 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 is misrepresentation.
• Example: In a Bombay case, the defendants chartered a ship from 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 plaintiff. She turned out to be of registered tonnage of more
than 3000 tons . It was held that defendants were entitled to avoid charter party. There was positive
assertion by plaintiff about the size of ship an assertion not warranted by any information the
plaintiff had that time, which was not true.

❑ Breach of Duty: Any breach of duty which brings an advantage to person committing by misleading
the other to prejudice is misrepresentation. This clause is to meet all those cases which are called in
court of equity.... cases of "constructive fraud", in which there is no intention to deceive.
• Example: The plain having no time to read the contents of deed, signed it as he was given the
impression by defendant that it contained nothing but formal matters already settled between them.
❑ Inducing mistake about subject matter: Causing however innocently a party
to an agreement to make a mistake as to substance of thing which is the
subject of agreement is also misrepresentation. Subject matter of every
agreement is supposed by parties to possess certain value or quality. If one of
parties leads the other, however innocently to make a mistake as to nature of
quality of subject matter is misrepresentation.

❑ Suppression of vital facts: Misrepresentation may also arise from

Suppression of vital facts. Cases of concealment or Suppression will fall either
sub section(2) when it amounts to breach of duty And sub section(3) when it
leads other party to make a mistake about subject matter of agreement.
▪ Case law R vs Kylsant, the prospectus of a company stated that company had
regularly paid dividends, which created impression that company had been
running into losses for last several years and dividends could be paid out of
wartime accumulated profits. Suppression of this fact was held
misrepresentation
CONDITIONS THAT ARE NECESSARY FOR
MISREPRESENTATION
■ Of Material Facts:-
Misrepresentation should be of facts material to contract. Example: In matters of matrimony it has
been held that qualifications of spouse are material fact. Where girl was in a 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
misrepresentation.
■ Representation of state of mind:-
A representation of one's state of mind is also a representation of fact. Example: In Edgington vs
Fitzmaurice the prospectus of a company miss misstated the purpose to which money to be borrowed
by issuing debentures was going to be applied. Directors contented that representation related to state
of their mind as to what use the money was going to put and they could change their mind and it was
not misrepresentation
■ EXPRESSION OF OPINION
■ CHANGE OF CIRCUMSTANCES
■ INDUCEMENT
■ MEANS OF DISCOVERING TRUTH
FRAUD

Fraud’ in SECTION 17 defined:—

'Fraud' means and includes any of the
FRAUD
following acts committed by a party to a
contract, or with his connivance, or by his
agent', with intent to deceive another party
LEGAL thereto or his agent, or to induce him to
PROVISION enter into the contract:—
■ the suggestion, as a fact, of that which
is not true, by one who does not
SECTION SECTION SECTION believe it to be true
17, ICA 19, ICA 415, IPC ■ the active concealment of a fact by one
having knowledge or belief of the fact;
■ a promise made without any intention
of performing it
■ any other act fitted to deceive
■ any such act or omission as the law
specially declares to be fraudulent
DERRY VS PEEK
■ Derry vs Peek A company's prospectus contained a representation that the
company had been authorized by a special Act of Parliament to run trams by
steam or mechanical power. The authority to use steam was, in fact, subject
to the approval of the Board of Trade, but no mention was made of this. The
Board refused consent and consequently the company was wound up. The
plaintiff, having bought some shares, sued the directors for fraud. But they
were held not liable. They were not guilty of fraud as they honestly believed
that once the Parliament had authorized the use of steam, the consent of the
Board was practically concluded. It follows, therefore, that the person making
a false representation is not guilty of fraud if he honestly believes in its truth.
Thus intentional misrepresentation is of the essence of fraud. The first three
clauses of Section 17 deal with this kind of fraud.
ILLUSTRATIONS OF FRAUD
■ If someone delivers a suggestion
(that he himself does not believe
to be true) as a fact, it is
considered fraud. For example, X
knows that Mr. Z is a cheater. Still,
X suggests to Y that Mr. Z is an
honest man and you can do
business with him. Here, X has
committed fraud.
IMPORTANT CONCEPTS
❑ ACTIVE CONCEALMENT

➢ If someone delivers a suggestion (that he himself does not believe to be true) as a fact, it is
considered fraud. For example, X knows that Mr. Z is a cheater. Still, X suggests to Y that Mr. Z is an
honest man and you can do business with him. Here, X has committed fraud.

❑ MERE SILENCE IS NO FRAUD

➢ Mere silence is not considered Fraud. Generally, a failure to disclose information or maintain silence
is not deemed Fraud under the Indian Contract Act. Mere silence alone does not constitute fraudulent
behavior unless the case circumstances require the person to speak and disclose relevant facts or if
the person’s silence can be considered equivalent to making a statement. In such situations, where
there is a duty to speak or the silence itself is deceptive, the Act of keeping silent can be considered
Fraud under the Indian Contract Act.
➢ Example: A sells by auction to B, a horse which A knows to be unsound. A says nothing to B about
the horse's unsoundness. It is not fraud. Mere silence is not fraud: A person is not bound to disclose
the defect of his articles.
*WHEN SILENCE IS FRAUD*
❑ DUTY TO SPEAK
➢ Duty to speak Duty to speak arises where one contracting party reposes trust and confidence
in the other. For Example: a father selling a horse to his son must tell him if the horse is
unsound, as the son is likely to rely upon his father.
➢ Duty to speak also arises where one of the parties is utterly without any means of discovering
the truth and has to depend on the good sense of the other party . Example: Where a person
got his motor vehicle insured in the evening, when in the morning, the vehicle had met with an
accident, the policy was held to be not enforceable, the duty of the insurer to check the
vehicle notwithstanding.

❑ WHERE SILENCE IS DECEPTIVE

➢ Silence is sometimes itself equivalent to speech. A person who keeps silent, knowing that his
silence is going to be deceptive, is no less guilty of Fraud. Where, for example, the buyer
knows more about the value of the property, which is the subject of sale, but prefers to keep
the information from the seller, the latter may void the sale.
❑ CHANGE OF CIRCUMSTANCES
➢ Sometimes a representation is true when made, but, it may, on
account of a change of circumstances, become false when it is
actually acted upon by the other party. In such circumstances, it
is the duty of the person who made the representation to
communicate the change of circumstances.
❑ HALF-TRUTHS
➢ Even when a person is under no duty to disclose a fact, he may
become guilty of fraud by non-disclosure if he voluntarily
discloses something and then stops half the way. A person may
keep silence, but if he speaks, a duty arises to disclose the
whole truth.
❑ PROMISE MADE WITHOUT INTENTION TO PERFORM
➢ It is to tie up a person to a promise with no intention of performing from one’s side and with
the intention of only preventing the other from dealing with others is an example of a
promise made without the intention of performing it.

❑ ANY OTHER ACT FITTED TO DECIEVE

➢ The fourth type of fraud outlined in Section 17 includes any act designed to deceive. This
encompasses intentional deceitful actions as well as those that, while not originating from a
malicious intent, have the tendency to mislead or violate trust, and are therefore prohibited
by law.

❑ ANY ACT OR OMISSION DECLARED TO BE FRADULENT

➢ the fifth category of fraud in Section 17 covers acts or omissions explicitly declared
fraudulent by law.
➢ For instance, under the Insolvency Act and Companies Act, certain transfers are labeled as
"fraudulent preference." This category ensures that intentional deceit in various legal
contexts, such as fraudulent transfers under the Transfer of Property Act, is encompassed .
DIFFERENCE BETWEEN FRAUD AND MISREPRESENTATION
RESCISSION

• Voidability of agreements without free consent.

SECTION When consent to an agreement is caused by coercion, fraud or

misrepresentation, the agreement is a contract voidable at the
option of the party whose consent was so caused.
A party to a contract whose consent was caused by fraud or
misrepresentation, may, if he thinks fit, insist that the contract shall

19 be performed, and that he shall be put in the position in which he

would have been if the representations made had been true.

• Power to set aside contract induced by undue influence.-

SECTION When consent to an agreement is caused by undue influence, the

agreement is a contract voidable at the option of the party whose
consent was so caused.
Any such contract may be set aside either absolutely or, if the
party who was entitled to avoid it has received any benefit

19(A) thereunder, upon such terms and conditions as to the Court may
seem just.
LOSS OF RIGHT OF RESCISSION
❑ By affirmation :-
➢ Where the party, after becoming aware of his right to rescind, affirms the
contract, the right of rescission is lost. Affirmation may be express or
implied. An implied affirmation takes place when he does some act
inconsistent with his right to rescind.

❑ Lapse of time :-
➢ Rescission must be claimed within reasonable time after discovering the
misrepresentation.

❑ Intervention of rights of third parties :-

➢ The right of rescission is lost as soon as a third party, acting in good faith,
acquires rights in the subject-matter of the contract.
❑ MODE OF RECESSION :-
➢ The usual method of rescinding a contract
is by giving a notice to the other party of
the intention to rescind but what should he
do if the other party cannot be contacted?
The answer is to be found in Car &
Universal Finance Co Ltd v Caldwell.

❑ SECTION- 66
➢ Mode of communicating or revoking
rescission of voidable contract.
RESTITUTION
Consequences of rescission of
voidable contract.-
When a person at whose option a
contract is voidable rescinds it, the
other party thereto need not
perform any promise therein
contained in which he is promisor.
The party rescinding a voidable
SECTION contract shall, if he have received
any benefit thereunder from
another party to such contract,
64, ICA restore such benefit, so far as may
be, to the person from whom it was
DAMAGES FOR INNOCENT
MISREPRESENTATION
■ A person who is the victim of a fraud is entitled to sue for damages,
fraud being a tort also. But the victim of an innocent misrepresentation
was not allowed to recover any compensation for any loss that might
have been occasioned to him by the misrepresentation. Liability in tort
for negligent or innocent misrepresentation is still groaning for
recognition. However, much of the suffering of the victims of innocent
misrepresentations have now been relieved by the (English)
Misrepresentation Act, 1967.
BIBLIOGRAPHY
➢ Avtar Singh, Contract and Specific Relief (12th
edition, Eastern Bok Co, 2017)
➢ IPleadersblog.com
➢ Indiacode.nic.in
➢ Lawprof.co
➢ Legalservicesindia.com
➢ Advocatekhoj.com
➢ Scribd.com
➢ Livelaw.com
➢ Lawbhoomi.com
➢ Edurev.in