MISREPRESENTATION

A misrepresentation is an untrue statement of a material fact made by one party which affects the other party’s decision in corresponding to a contract. If the mis-representation is identified, the contract can be declared void.

ACCORDING TO SECTION 18 OF INDIAN CONTRACT ACT, 1872

“Misrepresentation is a form of a statement made preceding to the contract being completed. There are two varieties of statement that can be performed before a contract is formed, these will either:

  1. Form part of the contract.
  2. Not form part of the contract, therefore it becomes a representation.”

Thus, Misrepresentation is about giving of inaccurate information by one party (or their agent) to the other before the contract is made which induces them to make the contract. If a person makes a contract in reliance on mis-representation and has to face loss as a result, they can revoke the contract or claim damages.

TYPES OF MISREPRESENTATION

There are three types of mis-representation present in the contract:

FRAUDULENT MISREPRESENTATION

Fraudulent Misrepresentation is when an individual knowingly and intentionally uses false statements of fact to induce another party to enter into a contract. An offending party must either not believe in the truth of his statement or must show reckless disregard for whether a statement is true or not. The offending party’s intent must have been to induce the aggrieved party into entering into the contract.

A claimant who has been the victim of fraudulent mis-representation can claim both rescission, which will set the contract aside, and damages. With respect to damages, only actual losses stemming from the misrepresentation may be claimed.

In a lawsuit, a plaintiff must prove the elements of fraudulent mis-representation. Specifically, that:

  1. A representation was made—an action or statement of factual substance.
  2. The representation was false.
  3. At the time, the representation was either known to be false or was made with reckless disregard for whether it was accurate.
  4. The representation was purported as being a reliable fact.
  5. The representation was relied on.
  6. A loss was experienced because of the false representation.

NEGLIGENT MISREPRESENTATION

Negligent misrepresentation is a false statement made by a person who had no reasonable grounds for believing it to be true. Instead of direct lies, negligent misrepresentations are careless statements of fact that are untrue. When selling or marketing, each party has a duty to make sure that reasonable care is exercised when making representations of fact.

In court, the claimant must prove that the offender had no reasonable ground for believing the representation to be true. The claimant must also prove intent—that the offender sought to induce the claimant to rely on the mis-representation. In many courts of law, the claimant must prove that his reliance on the misrepresentation was reasonable. In addition, the claimant must have incurred a loss from relying on the misrepresentation.

INNOCENT MISREPRESENTATION

In innocent misrepresentation, a party had reasonable grounds for believing that a misrepresentation was true at the time of statement. The sole legal remedy to innocent misrepresentation is the award of damages—the contract cannot be rescinded. Similar to other types of misrepresentations, to pursue damages, a claimant must show that he suffered a loss because of the misrepresentation.

REMEDIES OF MISREPRESENTATION

The contract made in misrepresentation is voidable which is not done intentionally by the party. Damages and/or rescission of the contract are the main remedies and the availability of these will depend on the type of misrepresentation that has occurred.

  • Rescission – Rescission of the contract essentially unravels the contract and seeks to place the parties back in the position they were in before the contract was entered into. The claimant may choose to affirm the contract instead of rescinding it.
  • Affirmation – Affirmation results in the continuation of the contract and once affirmed, the contract can no longer be rescinded. Affirmation can occur expressly or impliedly by word or conduct. Care should be taken here as a party may affirm a contract without intending to, for example, if he discovers the misrepresentation but does not do anything about it for a long time, he may be taken to have affirmed the contract. It is therefore crucial that you seek legal advice as soon as possible if you think that a misrepresentation has been made to you.
  • Damages in lieu of rescission – If there has been negligent misrepresentation or innocent misrepresentation, the courts may choose to award damages in lieu of rescission. In making this decision, they will consider the fairness of making such an award, taking into account the misrepresentation made, any loss that would be caused if the contract continued and the loss that would be suffered by the representor if the contract was rescinded.
  • Calculation of damages – Damages awarded in respect of a successful claim seek to place the claimant in the financial position he would have been in had the misrepresentation not been made. This is different to damages awarded for a breach of contract claim which seek to place the claimant in the financial position he would have been in had the breach not occurred. The difference is more than a matter of linguistics and can materially affect the amount of damages awarded.
  • Mitigation – The claimant under any misrepresentation claim must attempt to reduce or minimize his loss. This is known as mitigation. Failure to do so may affect the amount of damages awarded to him. For example, Paul wants to buy new furniture for his house but is worried that his children will damage it with their toys. The sales adviser assures him that the furniture has been treated with a special scratch-resistant coating which will protect it. Within two months, the furniture is scratched and damaged, and it transpires that the furniture did not have the coating put on it in the first place. If Paul continued to allow his children to run their toy cars all over the furniture with the end result that it was completely ruined, he would have failed to mitigate his loss and his damages may be reduced accordingly.
Type of claim Remedy
Fraudulent misrepresentation Rescission
and
Misrepresentation damages. Loss does not have to be reasonably foreseeable
Negligent misrepresentation Rescission (or damages in lieu of rescission)
and
Misrepresentation damages. Loss does not have to be reasonably foreseeable
Innocent misrepresentation Rescission (or damages in lieu of rescission)

LIMITATIONS AVAILABLE TO REMEDIES

A condition can be included in a contract that limits the remedies that will be available wherever a party has the right to make a misrepresentation claim. For instance, such a clause could limit the remedies to those available for breach of contract– definitely excluding the right of the innocent party to revoke the contract.

CONCLUSION

If there has been a misrepresentation or a mistake the contract may be declared void and therefore be abolished. If a contract is a void then it cannot be enforced by both of the parties, whereas if a contract is interpreted as voidable then although it is a valid contract it can be cancelled or revoked.

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