Misrepresentation is one of the disaffirmation clauses in the law of contracts mainly because it protects contracting parties from unjust and fraudulent conduct when entering into contracts. According to Section 18 of Indian Contract Act, 1872 misrepresentation means the communication of a statement that is false in a situation where the person communicating the statement knows or believes that the statement is true. Misrepresentation is not a deliberate act of deception like fraud, it comes about when a party provides information regarding a certain matter and the other party is induced to enter into a contract in reliance on the information given, although it is false. Section 18 of Indian Contract Act, 1872 seeks to make the contractual relations truthful, therefore making contracts formed the basis of true and accurate information hence which is fair and just.
Elevate your career with a 4-month Certification in Contract Drafting & Negotiation, focusing on AI tools. Gain expertise in drafting contracts across sectors, handling negotiations, and mastering contract life cycle management.
Understanding Section 18 of Indian Contract Act, 1872
According to Section 18 of Indian Contract Act, 1872, misrepresentation is giving a false account, even though you feel it is the truth. It can happen in the following ways:
Section 18(1) says that if a person gives an opinion which is incorrect, where they do not have adequate information to determine the accuracy of this opinion but they deem it accurate.
Section 18(2) says that misrepresentation is when there is a situation where a person has neglected doing something they were supposed to do and in a process he or she does not intend to mislead people but end up benefiting from the action they should not undertake or bring hardship to other people by doing something they should not do.
Section 18(3) says that misrepresentation is also when an individual makes a false statement which is in fact innocent and has caused another individual to engage in an activity that is damaging to his/her self.
Essential Elements of Section 18 of Indian Contract Act, 1872
Three different situations are described in Section 18 that render a statement or an act as a misrepresentation. To understand the importance of each, let us define these categories.
Positive Assertion of False Fact Believing it to be True
The first type of falsehood described in Section 18 of Indian Contract Act, 1872 says misrepresentation is a situation in which a person makes statements that he or she considers to be true in the sense that they are affirmative but in actuality, are false. The essence in this case is that the speaker of such a statement cannot really know that what he has stated is untrue, and is indeed fully aware that they are telling the truth.
For example, if a car seller informs a buyer that the car is in perfect working order he or she knows it to be true despite the car being actually faulty, then this constitutes misrepresentation. The seller had no ill motive in making the statement a lie but the buyer relied on the same statement made by the seller.
Such an implication can be made even in situations where the party that utters the words did not intend to tell a lie. The failure to actually know that the material was false is crucial if it was made with gross recklessness or negligence, that is another ground for an action for misrepresentation.
Breach of Duty without the Intent to Deceive
The second component of Section 18 of Indian Contract Act, 1872 relates to fraudulent non-disclosure where the person has a duty to disclose information and where his failure to disclose leads to a loss to the other party contrary to the intention of the former.
Here the deception is not necessarily in the form of a lie, but may be achieved by failure to disclose or hide ‘something’.
For example, where a seller has a legal claim to the property being sold does not reveal this to the buyer even though the seller has no intention of deceiving the buyer, this would amount to misrepresentation hence, lack of necessary details leads to the buyer making a decision adversely while they actually desired the opposite.
Such a deception shows that omission of material facts or engaging in certain conduct can be as prejudicial as making a statement that is literally untrue.
Innocent Misrepresentation Leading to Detriment
Misrepresentation under Section 18(3) of Indian Contract Act, 1872 refers to a situation where one party makes a statement, which is false, and another party relies on that statement and suffers loss as a result of that reliance, even if the maker of the statement did not intend to deceive the other party.
For example, if one claims to be having the first edition of a book, with the knowledge being true that the book being sold is in fact the first edition, but in the real sense it is a later edition, the buyer may have overpaid on this belief. Although the seller may not have had any malicious intentions, the buyer loses money because of the reliance on the fake information.
Impact of Misrepresentation
Section 18 deals with misrepresentation that affects the contract and the rights of the parties to the contract. If a contract is formed based on misrepresentation, the aggrieved party may seek remedies such as:
Rescission of the Contract: The party which was put on the wrong side due to the misrepresentation has the right to cancel (rescind) the contract. This brings back the position of the two parties before entering into the contract, virtually meaning that the contract never existed.
Damages: Where the misrepresentation has led to a loss, the mentally injured party may seek damages. However, wherever damages are claimed for misrepresentation, special damages are not awarded for all types. If the misrepresentation was innocent as per Section 18(3) of Indian Contract Act, the remedy for the aggrieved party would typically be rescission and not an action for damages unless the party committing the misrepresentation was negligent or had a duty to disclose certain facts.
Restitution: The aggrieved party may be awarded restitution which is the restoration of the items exchanged under the contract in case of the contract being rescinded.
Learn about void agreements given under Section 19 of Indian Contract Act, 1872
Misrepresentation v. Fraud
Both misrepresentation and fraud result into violation of terms of a valid contract under Section 11 of Indian Contract Act, 1872, they possess few distinction as well:
The difference between fraud and misrepresentation is that fraud involves an intention to deceive whereas a misrepresentation arises out of a mistake of fact. Fraud is where the person making a false statement knows that the statement is false, and acts to deceive another party. On the contrary, misrepresentation is frequently done by innocent ignorance or mistake, and without intent to deceive.
For example:
In Fraud: seller says the car is in perfect condition when he knows that it is defective.
In Misrepresentation: The seller genuinely believes the car is in good condition, even if the car in reality is defective and so the buyer thinks the same.
So when it comes to fraud and misrepresentation, the falsity of the information is integral, but the intent is not the same and the consequences are not the same.
Summary
Section 18 of Indian Contract Act, 1872 is an important provision for protection of the parties who refrain from entering into the contract because of giving false assurances. Although, misrepresentation does not involve deceitful intent it can lead to damages to the aggrieved party, and hence the law frames provisions for the redress to such misrepresentation by rescission of contract, or damages or restitution. Section 18 of Indian Contract Act, 1872 is imperative to develop trust and honesty in contractual arrangement in India.
Read essential elements of a valid contract in Indian Contract Act, 1872
Section 18 of Indian Contract Act, 1872: FAQs
Q1. What does Section 18 of the Indian Contract Act, 1872 deal with?
It deals with misrepresentation, where a false statement is made innocently, leading the other party to enter the contract.
Q2. What is the difference between misrepresentation and fraud?
Misrepresentation is an innocent false statement, while fraud involves deliberate deception. Fraud is covered under Section 17.
Q3. Can a contract be rescinded under Section 18 for misrepresentation?
Yes, the contract can be rescinded by the affected party and they may also claim damages.
Q4. What remedies are available under Section 18 for misrepresentation?
The contract can be rescinded, and the affected party may seek compensation for the loss caused.
Q5. Does Section 18 apply if a third party makes the misrepresentation?
Yes, it applies even if the misrepresentation was made by a third party, as long as it induced the contract.
Q6. What proof is required to establish misrepresentation under Section 18?
The affected party must prove that a false material statement was made, which led them to enter the contract.
