Law Embracing 'Misrepresentation' In Contracts

[ad_1] Introduction The importance of the term 'misrepresentation' can be inferred from the fact that "free consent" which...

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Introduction

The importance of the term 'misrepresentation' can be inferred from the fact that "free consent" which is inevitable for an agreement to be enforceable under Section 14 of Indian Contract Act, 1872 is rendered negative if misrepresentation is proved. In other words, misrepresentation to any party in a contract so as to induce them for consent renders the contract void.

Section 18 of the Indian Contract Act, 1872 (the "Contract Act") defines misrepresentation. This section is quoted below:

"Misrepresentation" means and includes -

(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 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."

With regard to contract, the general principal is that if one party has induced the other to enter into a contract by misrepresentation, though innocently of any material fact specially within his own knowledge, the party misled can avoid the contract. The party who was induced by misrepresentation to enter into a contract, has two remedies open to him; (i) to elect to rescind the contract, or (ii) to seek enforcement of representation and insist upon being placed in the same position as if the contract was performed by claiming damages."

Under Section 19 of the Contract Act, the right of rescission is available where consent is caused by misrepresentation.

Section 19 of the Contract Act provides for voidability of agreements without free consent. This section is quoted below:

"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 be performed, and that he shall be put in the position in which he would have been if the representations made had been true.

Exception: If such consent was caused by misrepresentation or by silence, fraudulent within the meaning of section 17, the contract, nevertheless, is not voidable, if the party whose consent was so caused had the means of discovering the truth with ordinary diligence.

Explanation: A fraud or misrepresentation which did not cause the consent to a contract of the party on whom such fraud was practiced, or to whom such misrepresentation was made, does not render a contract voidable."

Illustration:

A, by a misrepresentation, leads B erroneously to believe that five hundred mounds of indigo are made annually at A's factory. B examines the accounts of the factory, which show that only four hundred mounds of indigo have been made. After this B buys the factory. The contract is not voidable on account of A's misrepresentation because of lack of 'due diligence'.

Section 19A of Indian Contract Act, 1872 states that:-

"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 absolutely or, if the party who was entitled to avoid it has received any benefit thereunder, upon such terms and conditions as to the Court may seem just".

A Comparative Study of Correlation Between Misrepresentation and Sale Of Goods

Section 3 of the Sale of Goods Act states that:

"The unrepealed provisions of the Contract Act save in so far as they are inconsistent with the express provisions of the Sale of Goods Act, shall continue to apply to contracts for the sale of goods".

Section 12 of the Sale of Goods Act, 1930 provides the difference between 'condition' and 'warranty' and read as follows:-

"12. Condition and warranty, - (1) A stipulation in a contract of sale with reference to goods which are the subject thereof may be a condition or a warranty.

(2) A condition is a stipulation essential to the main purpose of the contract, the breach of which gives rise to a right to treat the contract as repudiated.

(3) A warranty is a stipulation collateral to the main purpose of the contract, the breach of which gives rise to a claim for damages but not to a right to reject the goods and treat the contract as repudiated.

(4) Whether a stipulation in a contract of sale is a condition or a warranty depends in each case on the construction of the contract. A stipulation may be a condition, though called a warranty in the contract".

Further, Section 13 of the Sale of Goods Act, 1930 provides when 'condition' to be treated as `warranty', relevant part of sub-section (1) & (2) thereof reads as under:-

"13. When condition to be treated as warranty. - (1) Where a contract of sale is subject to any condition to be fulfilled by the seller, the buyer may waive the condition or elect to treat the breach of the condition as a breach of warranty and not as a ground for treating the contract as repudiated.

(2) Where a contract of sale is not severable and the buyer has accepted the goods or part thereof, the breach of any condition to be fulfilled by the seller can only be treated as a breach of warranty and not as a ground for rejecting the goods and treating the contract rejecting the goods and treating the contract as repudiated, unless there is a term of the contract, express or implied, to that effect."

Distinction Between Misrepresentation and Fraud: Clearing the Imbroglio

Definition of Fraud as per Indian Contract Act, 1872:

Section 17:- "Fraud" means and includes any of the following acts committed by a party to a contract, or with his connivance, or by his agent, with intent to deceive another party thereto or his agent, or to induce him to enter into the contract:

(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 speak, or unless his silence is, in itself, equivalent to speech.

Illustration

(a) A sells, 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.

Distinction:-

As we can infer from the Indian Contract Act, misrepresentation is an innocent act of deceit whereas fraud inevitably includes the intention to deceive. As the deception is deliberate, the contract becomes void after fraud is proved whereas in case of misrepresentation the contract is voidable at the option of the party deceived. However, both are forms of undue influence as per Section 16 of Indian Contract Act.

Bellachi (Dead) by LR Vs. Pakeeran JT 2009(4) SC 298

Subject matter of the suit was a deed of sale dated 7th October, 1999 executed by the petitioner in favour of the respondent. The amount of consideration was shown therein to be a sum of Rs. 20,000/.Contention of the appellant in the said suit was that the said deed of sale is vitiated by misrepresentation, undue influence, fraud and collusion as she was made to believe that she would obtain financial assistance by executing the said document. According to her, she had reposed complete faith and trust in her brother who used to visit her place often. The law does not envisage raising of a presumption in favour of undue influence. A party alleging the same must prove the same subject of course to just exceptions. Hence, the plaint was dismissed.

State of Karnataka and Anr. Vs. All India Manufaturers Organization and Ors. AIR 2006 SC 1846

State of Karnataka decided to take up "Bangalore-Mysore Infrastructure Corridor Project" with a consortium. For the very same, Memorandum of understanding (MOU) was entered into between the petitioner and a consortium of companies.Government order (GO) was also passed. Members of consortium entered into an agreement for assigning their respective rights under the GO and MOU in favour of Nandi Infrastructure Corridor Enterprises Ltd. Nandi submitted a framework agreement (FWA) which was approved by the petitioner.One of the key obligations of petitioner under FWA was to make land available.Karnataka Industrial Areas Development Board entered into an agreement with Nandi for acquisition of private land. Henceforth, notifications were issued.FWA was challenged in public interest writ petition. The petitioner took the plea that they had given their consent due to misrepresentation by Nandi. The inference drawn by the High Court was that the plea of fraud and misrepresentation sought to be raised was not only an afterthought but also false to the knowledge of the State Government. The High Court, therefore, observed (vide Paragraph 27): "It is unfortunate that the petitioners and the State Government have chosen to raise this bogie (sic- bogey) to defeat the public project subserving public interest. On appeal, Supreme Court upheld the view of High Court regarding the plea of misrepresentation.

Union of India and Ors. Vs. R.P. Yadav AIR 2000 SC 2252

A contract had been entered between Indian navy and artificial apprentice. The question dealt with was whether artificer apprentice of Indian Navy who had been given re-engagement for certain period after obtaining his consent for it entitled to withdraw consent and demand his release from force as of right. It is the case of respondant in his writ petition that he agreed to be reengaged was based on the misrepresentation on the part of the appellants to him that he had only completed 11 years of pensionable service and that he required another four years to earn the pension. As such, it was contended he had a right to rescind the contract under Section 19 of the Contract Act. The appellants by sending Raj Kumar the "Expiry of Engagement Serial" expressly represented to him that he had put in only 11 years of pensionable service and that he should apply for extension for four years to qualify for pension. Therefore, the court held that the consent of artificial apprentice was obtained through misrepresentation.

Sri Tarsem Singh Vs. Sukhminder Singh AIR 1998 SC 1400

Parties entered into a contract for sale of certain land and certain amount was paid to petitioner as earnest money. Suit for specific performance filed when petitioner did not execute sale deed and decreed by Trial Court. In appeal Additional District Judge observed that both parties suffered from mistake of fact as to area of land and sale. Consideration was already paid by the respondent. Decree for specific performance was not passed but decree for refund of earnest money was passed which was confirmed by High Court and Supreme Court. The Supreme Court upheld that the respondent was subjected to misrepresentation by the petitioner as the latter made a false promise to sell the disputed property.

M/s. Arosan Enetrprises Ltd. Vs. Union of India & Anr. AIR 1999 SC 3804

The factual score depicts that on 24th October, 1989, the appellant furnished a performance bank guarantee for $ 29,28,000 and upon bank guarantee being furnished, the Government of India assigned the contract to the Food Corporation of India (FCI) under Clause 20 of the Agreement. FCI also in its turn opened a Letter of Credit for the full value of the contract though, however, as the records depict that while on 26th October, 1989, the Letter of Credit was opened by FCI but its authentication was not effected within the delivery date i.e. 31st October, 1989. Point to be noted is that the Bank, can not, by merely stating that there was non-supply of goods by the appellant, use the words "fraud or misrepresentation" for purposes of coming under the exception. The dispute as to non-supply of goods was a matter between the seller and buyer and did not, as stated in the above decision, provide any cause of action for the Bank against the seller.


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Source by Anooja Srivastava

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