Misrepresentation Section 18: 5 Best Proven Defenses

This Article is written by Sneha Pandey during her internship with LeDroit India.

1. Abstract

The foundation of any valid contract lies in the principle of “Free Consent,” which is provided under Section 14 of the Indian Contract Act of 1872. The very basis of any contract becomes unstable when the consent is obtained by false statements or concealment of facts. This paper looks into the concept of Misrepresentation under Section 18 of the Indian Contract Act of 1872. The discussion would revolve around distinguishing the innocent and negligent misstatements.

While fraud involves a mens rea that is, an intention to defraud, misrepresentation is when a false statement is made innocently and the person believes it to be true, or the statement is made negligently and there is no intention to deceive. With the help of statutory provision, Section 19, which makes a contract voidable, and the important defense of “ordinary diligence” provided under this section, this paper attempts to discuss the different liabilities of innocent and negligent statements.

2. Keywords

Misrepresentation, Section 18, Indian Contract Act 1872, Free Consent, Innocent Statement, Negligent Misstatement, Voidable Contract, Breach of Duty.

3. Introduction to Free Consent and Vitiating Factors

The very basis for having a legitimate contractual relationship is that of consensus ad idem, which means a “meeting of the minds.” As per Section 13 of the Indian Contract Act, 1872, consent is legally defined as the meeting of two or more people in understanding and agreement about the same thing in the same sense. It is characterized by the presence of understanding, complete harmony and exchange of promises about the object and the terms of the agreement. Without such fundamental agreement, a contract is nothing but an illusion of an agreement.

Nevertheless, it should be understood that mere consent or signing of a document without any thought is not sufficient for a contract to be legally binding on its parties. In order to have an agreement that is enforceable before a court of law, it should be absolutely “free.” As per Section 14 of the Act, there can be no consent unless the same is absolutely free of Coercion (Section 15), Undue Influence (Section 16), Fraud (Section 17), Misrepresentation (Section 18) or Mistake (Sections 20, 21 and 22). All these factors are known in legal jurisprudence as the “vitiating factors” that take away the element of freedom of autonomy and agency of the contracting party.

In this context, Misrepresentation (Section 18) stands out as a distinctive and very complicated concept in commercial and civil disputes. As opposed to fraud that arises from malicious intent to deceive (mens rea), misrepresentation does not involve any malevolence. The situation involves passing misleading information with no malice, which nevertheless proves to be decisive factor in convincing the other contracting party. Such deals are essentially based on wrong premises.

The philosophy of the law of contract stipulates that it is grossly unfair and inequitable to force somebody to fulfill his/her contractual duties in the belief of some misleading facts irrespective of whether the one presenting these facts wanted to lie or not. Since the decision-making process of the misled party is compromised because of the misleading information, misrepresentation acts as an important vitiating factor. As a result, according to Section 19 of the Act, such a contract is not totally invalid from the moment it was signed (void ab initio) but becomes “voidable” at the discretion of the aggrieved party. This enables the party who was misled to be put in an equitable position whereby he can either cancel the contract and recover his money or allow the contract to stand and enforce performance of it.

4. Legal Definition: Misrepresentation Defined in Section 18

The Indian Contract Act defines Misrepresentation comprehensively in Section 18. This section identifies misrepresentation in three different clauses:

1. Unjustified Positive Misstatement (Section 18(1)): Unjustifiable positive misstatement, in a manner which is not justified by the facts known to the person making it, of that which is not true, though he believes it to be true.
2. Misrepresentation by Breach of Duty (Section 18(2)): Any breach of duty which, without the desire to deceive, results in an advantage for the person who commits it or anyone else claiming under him by misleading someone to their detriment or to the detriment of any other person claiming under him.
3. Inducing Misunderstanding about the Substance of Agreement (Section 18(3)): Inducing someone making an agreement to make a mistake regarding the substance of the agreement.

The common factor in all these clauses is the absence of the desire to deceive. In the case where there is a desire to deceive, it is a clear case of Fraud defined in Section 17.

5. The Anatomy of Misrepresentation: Key Essential Elements

For any statement or conduct to be considered a misrepresentation, there should be certain essential elements met as follows:

1. There should be a representation: The statement should not be an expression of an opinion, an expression of intention, nor an exaggeration but rather should be factual. A statement such as “This is the best car in the world” constitutes sales puffery while a statement such as “This car has a mileage of 20 km/l,” whereas the true mileage is 10 km/l, is a representation of fact.
2. The representation should be false: The statement in question should be a false one.
3. The representation should influence the contract: The false representation should be an influential factor in causing the aggrieved party to enter into the contract. Failure of the other party relying on the statement would mean absence of misrepresentation.
4. Lack of Intention to Mislead: The person making the statement should truly believe in its validity (Innocent), or should make it negligently (Negligent).
5. Categorization: Innocent and Negligent Misrepresentations

Misrepresentation jurisprudence under Section 18 is divided largely into two practical categories: Innocent Misrepresentation and Negligent Misrepresentation. Although neither of the two entails any intention to deceive, there is a fine line between their causes and legal approaches.

F1. Innocent Misrepresentation: Unwarranted positive assertions

Innocent misrepresentation takes place when one makes a statement of facts that are known to be untrue, but he/she has the genuine belief that those facts are true. It is in Section 18(1) and Section 18(3).

Characteristics of Innocent Misrepresentations:

Belief in Facts: The representor has an absolute conviction in the truthfulness of his/her statement.

Absence of Reasonable Ground (Generally): Under section 18(1), the statement is “not warranted by the information which he possesses.” This means that the person assumed something even without any sufficient grounds for such an assumption despite the fact that the person was not trying to cheat anybody.

Innocent Inducing of a Mistake: According to Section 18(3), it is possible to induce an honest mistake about the subject matter of the agreement.

Illustration: For instance, ‘A’ sells the land to ‘B’, saying that it produces 50 tons of wheat annually based on his assumption since this is what he has heard from the former owner but he honestly believed this. It turns out that it produces only 20 tons. Here ‘A’ has honestly misstated something.

In the famous English case of Derry v. Peek (1889), it was laid down by the House of Lords that a false statement made in good faith is not fraudulent; it is merely an innocent misrepresentation. The case involved the directors of a tramway company making a representation in a prospectus stating that the company has got the power to work with steam, having good faith in the granting of their application for permission from the Board of Trade as a matter of formality, but the application was refused.

F2. Negligent Misrepresentation: Breach of Duty and Constructive Fraud

Negligent misrepresentation takes place in the context of a false statement being made either negligently or without any justifiable reason that makes it appear true, by someone owing a duty to the other person making the representation.

According to Indian Contract Act, section 18(2) defines ‘any breach of duty which, without an intent to deceive, gains an advantage.’ It is called Constructive Fraud in the jurisprudence of equity. This situation arises when there exists a fiduciary relationship or a legal duty upon a person to tell the truth.

Features of Negligent Statements:

1. Presence of Duty: A legal or fiduciary duty of telling the truth is present from one side, i.e., from the representor to the representee. These types of duties usually exist between bankers and clients, solicitors and clients, and partners.
2. Breach of Duty: The representor does not meet the required standard of care, leading to an error.
3. Gaining an Advantage: An advantage is gained by the representor or someone below him through such negligent representation.

Development of the Common Law Doctrine: The doctrine of negligent misstatement which results in economic damage was developed in the case of Hedley Byrne & Co Ltd v Heller & Partners Ltd (1964). In this case, it was decided by the House of Lords that a duty of care could exist with respect to oral or written statements. Where one who possesses a special skill takes it upon himself to exercise such skill for the benefit of another who trusts his skill, then there will be a duty of care. Where such duty is breached in giving negligent advice, liability of misrepresentation shall exist.

Example: “A”, a financial advisor, is approached by his client “B” to examine the profitability of a company before he invests in it. “A”, without verifying the company’s latest accounts, negligently advises “B” that the company is highly profitable. “B” invests in the company and incurs losses. “A” did not have the intention to mislead “B”. He had breached his professional duty of care. It is an example of negligent misrepresentation.

7. Comparative Analysis: Misrepresentation vs. Fraud

For a full understanding of Section 18, one must be able to differentiate between it and Fraud (Section 17). At times, the distinction can be difficult in complicated business dealings.

If the injured party could have discovered the truth by the exercise of ordinary diligence, then the

To fully grasp Section 18, it is imperative to distinguish it from Fraud (Section 17). The line separating the two can often blur in complex commercial transactions.

Feature	Fraud (Section 17)	Misrepresentation (Section 18)
Mens Rea (Intention to Deceive)	Present and critical element: the person making the statement knows that he/she is lying, or does not believe in the statement.	Absent: the person making the statement either believes that the statement is true, or acts out of negligence without intending to deceive.
Nature of the Statement	Concealment of information by the person or making false statements intentionally.	Making innocent statements or failing in duty without ill intentions.
Claim for Damages	The injured party can claim damages from the tort of deceit and annulment of the agreement.	The injured party may annul the agreement, but cannot claim damages from tort (except when there is a special duty of care, like negligent misstatements).
Means of Discovering the Truth	“Not being the means of discovering the truth” is not normally a defense against active fraud (in case of fraudulent silence).	In case the person wronged was capable of ascertaining the truth with due diligence, the contract cannot be rendered voidable.
Criminal Liability	Could face charges for cheating/forgery under Bharatiya Nyaya Sanhita (BNS).	Civil offense only, no criminal liability attached.

8. Legal Consequences of Misrepresentation: Voidability and Section 19

In case of a contract made through misrepresentation, the law of consequences under the Indian Contract Act is governed by Section 19. The contract becomes voidable at the option of the party who consented because of the misrepresentations.

The aggrieved party has two main options for the remedy:

1. Right to Rescind: The party has an option to avoid or set aside the contract. According to Section 64, if the aggrieved party avoids a voidable contract, then he/she has an obligation to restore any advantage he/she received under that contract to the other party.
2. Right to Affirm: The aggrieved party has the option to affirm the contract and ask to put him/her in a position in which he/she would have been if representations made were true.

Illustration: ‘A’, without any malicious intent, informs ‘B’ that a particular factory manufactures 500 units a day. ‘B’ buys that factory. After some time, ‘B’ finds out that the factory manufactures only 300 units. ‘B’ has an option to either set aside the transaction and get back his money (avoidance) or remain with the factory but claim compensation of the 200 units.

9. The Exception: Means of Discovering the Truth

The law does not necessarily offer protection to any party claiming being misled. Section 19 contains a vital exception designed to promote commercial prudence:

“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.”

This exception embodies the doctrine of Caveat Emptor (let the buyer beware) in a diluted form. If a false statement (innocent or negligent) is made, but the aggrieved party had the files, documents, or physical means readily available to easily verify the truth and chose to be lazy or negligent by not checking the law will not allow them to void the contract.

Ordinary Diligence: “Ordinary diligence” is what counts and not extraordinary investigation.

Case Illustration: In Shri Krishan v. Kurukshetra University 1976 AIR 376, a university student’s form showed he was short of attendance, but the university authorities failed to scrutinize the form properly before issuing the admit card. Later, they tried to cancel his candidature alleging misrepresentation. The Supreme Court held that the university had the means of discovering the truth with ordinary diligence (simply by looking at the form submitted). Hence, the contract (admission) could not be voided.

10. Landmark Judicial Interpretations

The judiciary in India has time and again provided clarity on the ambit of Section 18 through a number of landmark cases:

Oceanic Steam Navigation Comapany v. Soonderdas Dharamsey (1890) 14 ILR Bom 241: The defendants hired a vessel from the plaintiffs representing that the registered tonnage of the ship did not exceed 2800 tons. It transpired that the registered tonnage exceeded 3000 tons. The defendants did not agree to take on board the ship. The Court held that the defendants had the right to repudiate the contract owing to the fact that even though the representation was made innocently, it was misleading and had induced the contract.

Raj Kumar Soni vs. State of U.P. 2007 INSC 366: Here, it has been said that the suppression of facts is contrary to the law. The party which is guilty of hiding the correct facts should not get any benefit because it is considered here that the party does not go to the court with clean hands.

Long v. Lloyd [1958] 1 WLR 753: In this case, the defendant had sold his lorry to the plaintiff saying that it is in perfect condition. But there were many flaws in it. It was realized by the plaintiff during the very first trip of the lorry. Nevertheless, the plaintiff accepted the proposal of the defendant that he will pay half of the cost of repairs. But unluckily, the lorry collapsed entirely during the next journey. Thus, the plaintiff wanted to set aside the contract.

But the court held that the plaintiff had become aware of the misrepresentation under Contract Law during his very first trip and had the chance to avoid the contract. Thus, he could not claim any damages on account of misrepresentation.

11. Conclusion

Section 18 of the Indian Contract Act, 1872, is an important balance of power in business and personal contracts. The law appreciates the fact that human mistakes, human errors, or negligence form an inevitable part of any business transaction. By defining misrepresentations into two classes, i.e., innocuous representations and negligence, the Act makes it possible for the parties to avoid entering an inherently defective contract, even when the other party does not have any malicious intentions.

It is very important to know that the difference between these two types of representations influences the standard of care needed in the fiduciary and commercial relations. While the law is generous enough in giving a misled person the right of revocation, the “ordinary diligence” exception, mentioned in Section 19, ensures that the parties are not negligent in their own business transactions.