Mis-representation in law of contracts.

MISREPRESENTATION

INTRODUCTION

In Lecture 7 we have just completed we discussed consent by coercion and undue influence.  This lecture is a continuation on the vitiating factors; that is misrepresentation in a contract.  The lecture will show the legal consequences of such a contract.

1. MEANING

Misrepresentation means misstatement of a fact material to the contract.  Section 18 of the Ordinance defines misrepresentation to mean and include:

"(a) 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;

(b) 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;

(c) 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".

This section includes the following types of misrepresentation:

1.1 Unwarranted Statements

It is misrepresentation when a person positively asserts that a fact is true when his information does not warrant it to be so.  It is misrepresentation even though he believes the fact to be true.

Therefore, to establish misrepresentation on the ground of an unwarranted statement one needs to prove:

(i) that there was a positive assertion of a fact material to the contract;

(ii) that the assertion is not warranted by any information that the person asserting had at the time of making the assertion; and

(iii) that the assertion is not true.

a) When Is an Assertion Positive?

An assertion is positive when it states a fact affirmatively, for example, if A fraudulently informs B that A's estate is free from encumbrances and B buys the estate.  The assertion that the estate is "free from encumbrances" is positive.  It states a fact affirmatively.  Therefore, if the estate turns out to be subject to a mortgage, the assertion is a misrepresentation of a fact material to the contract.  Prudently, B would not have bought the estate if he were told that it was under a mortgage.

b) When Is a Statement Unwarranted by Information?

A statement is said to be warranted by the information of the person making it when he receives the information from a trust worthly source.  It should not be hearsay.  For example, B tells A that one C would be the director of a company.  It turns out that B had obtained this information not directly from C, but from another person called Z.  If the information proves to be untrue then it was not warranted by the information which B had at the time he made the statement.  B's source of the information is not trustworthly.  It is information grounded on hearsay.

Where a representation acquires the status of being a term of the contract, and it turns out to be untrue, the disadvantaged partly may not only avoid the contract, but also, sue for damages for breach.  For example, in the earlier hypothetical illustration, the assertion by A that "the estate is free from encumbrances" is a term of the contract.  It is because of that positive assertion that B decided to buy the estate.  B can sue A for breach of contract to recover damages and also avoid the contract.

1.2 Breach of Duty

Any breach of duty which brings an advantage to the person committing it by misleading the other party to his prejudice is a misrepresentation.

Breach of duty is a leeway for the courts to cover cases of "constructive fraud".  That is, cases where there is no intention to deceive, but where the circumstances are such as to make the party who derives a benefit from the transaction equally answerable in effect as if he had been actuated by motives of fraud or deceit.

The case of Oriental Banking Corp. vs John Fleming [187] 3 Bom 242 is very illustrative of such circumstances.  

In this case, the plaintiff, having no time to read contents of a deed, signed it as he was given the impression by the defendant that it contained nothing but formal matters already settled between them.  The deed, however, contained a release in favour of the defendants.

In allowing the plaintiffs to set aside the deed, the court held that the defendant was under no obligation, legally or morally, to communicate the contents of the deed.  But the plaintiff placed confidence.  It then became his duty to state fully without concealment, all that was essential to a knowledge of the contents of a contract".

It is apparent from the court's decision that if only one party to an agreement is possessed of some information which is material to the contract to be made, then such party is under a duty of disclosure of the information to the other party.

1.3  Inducing Mistake About Subject Matter

Where one party to an agreement causes the other party, however innocently, to make a mistake as to the substance of the thing which is the subject of the agreement, he or she commits misrepresentation.

The rule presupposes that the subject matter of every agreement possess certain value or quality.  Thus if one party leads the other, however innocently, to make a mistake as to the nature or quality of the subject matter, there is misrepresentation.

At times, misrepresentation may arise from suppression of vital facts.  Suppression of facts may either amount to breach of duty under subsection (2) of section 18, or may lead the other party to make a mistake about the subject matter of the agreement as provided under subsection (3) thereof.  Facts of each case have to be considered.

For example, in R vs Kylsant [1932] 1 KB 442; [1931] ALL ER Rep 179 the prospectus of a company stated that the company was making profits, whereas the truth was that the company had been running into losses for the last several years and dividends could only be paid out of war time accumulated profits.  The suppression of this fact was held to be a misrepresentation.  This misrepresentation would fall under subsection (2).  That is, breach of duty.

2. THINGS TO NOTE

"It is often fallaciously assumed that a statement of opinion cannot involve a statement of fact.  In a case where the facts are equally well-known to both parties, what one of them says to the other is frequently nothing but an expression of opinion.  But if the facts are not equally known to both sides, then a statement of opinion by one who knows the facts best involves very often a statement of a material fact, for he impliedly states that he knows facts which justify his opinion".

A representation of one's state of mind is also a representation of fact.  Thus, a misrepresentation  as to the state of a man's mind is a misstatement of fact.

(c) In order to rely on misrepresentation to avoid a contract, it is necessary that the misrepresentation must be the cause of consent.  That is, had it not been for the misrepresentation consent would not have been given.  Section 19 provides that if the misrepresentation did not cause consent to a contract of the party on whom such misrepresentation was made, does not render a contract avoidable.

(d) The representation must be made with the intention that it shall be acted upon by the other party.  That is, if a person to whom a statement was not addressed chooses to act on it, he cannot rely on misrepresentation to avoid the contract.