Fraudulent Misrepresentation

Fraudulent Misrepresentation

What is 'Fraudulent Misrepresentation'?

Fraudulent misrepresentation is a tort claim, typically arising in the field of contract law, that occurs when a defendant makes a intentional or reckless misrepresentation of fact or opinion with the intention to coerce a party into action or inaction on the basis of that misrepresentation.

To determine whether fraudulent misrepresentation occurred, the court will look for six factors:

1.A representation was made

2.The representation was false

3.That when made, the defendant knew that the representation was false or that the defendant made the statement recklessly without knowledge of its truth

4.That the fraudulent misrepresentation was made with the intention that the plaintiff rely on it

5.That the plaintiff did rely on the fraudulent misrepresentation

6.That the plaintiff suffered harm as a result of the fraudulent misrepresentation

Official Definition of 'Fraudulent Misrepresentation'

Section 17 defines Fraud whereas Section 18 defines misrepresentation from which fraudulent misrepresentation which is a type of misrepresentation is derived.

Section 17 in The Indian Contract Act, 1872

"Fraud" means and includes any of the following acts committed by a party to a contract, or with his connivance, or by his agent1 , with intent to deceive another party thereto of 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.

Section 18 in the Indian Contract Act, 1872

"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.

When consent to an agreement is caused by coercion, 1 *** 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.

Essentials of 'Fraudulent Misrepresentation'

• Knowledge of falsity

The party bringing the claim must be aware that it is false or else must lack a reasonable ground for its truthfulness.

• Intention to deceive

The object of the false assertion should be to compel the other party to conclude the contract.

• Reliance on the statement

The other side must have assumed the falsehood when they made their decision to enter into the contract.

• Materiality

The deceptive statement has to be material to the contract (i.e., it must have in some way materially informed the other party's choice).

'Fraudulent Misrepresentation' under Contract Law

If a party deceives or conceals a party to a contract to subscribe to a contract, it is called fraudulent misrepresentation in contract law.  This practice is contrary to the contract law principle that a contract must be entered into with integrity and impartiality.

Fraudulent misrepresentation claims can also stem from reckless statements. For example, if a moderator makes an assertion about the company for which he/she is not convinced is valid, etc. In this situation, the speaker recklessly induces the other party to enter into the contract.

Consequences of 'Fraudulent Misrepresentation'

According to Section 19 of Indian Contract Act, Fraudulent misrepresentation has strong negative consequences for the person who perpetrates it. The unhappy party is also allowed to obtain remedies that are designed to either annul the contract or to indemnify the damages. Consequences include-

1. Rescission of Contract

The dissatisfied party is entitled to get out of the contract, returning the parties to their pre-contract position as if the contract had been never concluded.

2.  Claim for Damages

A complaining party may recover damages for all loss and damage suffered based on the false assertion.

3.  Punitive Measures

In some instances, corrective damages may be placed on the fraudulent party to deter such act.

Legal Remedies for 'Fraudulent Misrepresentation'

1.  Rescission

According to Section 19 of Indian Contract Act, a contract induced by cheating is in per se voidable at the will of aggrieved party.

In the case of abortion fraud, the complainant needs to take disciplinary action promptly at the moment of discovery of the fraud.

2.  Damages

The wronged party may recover damages for any losses suffered resulting from the fraudulent misrepresentation, even outside those of tort.

3.  Specific Performance or instruction

Only in the extreme situation will the court impose specific performance or instruction to make further damage.

When a person tricks another person into signing a contract after lying or hiding necessary facts it is known as fraudulent misrepresentation under contract law. This practice is against the principle of contract law that contracts should be made with honesty and fairness.

Fraudulent misrepresentation claims can also stem from reckless statements. For example, say a negotiator makes a claim about the company that they aren't sure is true. In these cases, the person making the statement recklessly convinces the other party to enter the contract.

Case Law

The case of Salt v. Stratstone Specialist Ltd. (2015) is a significant example of a misrepresentation claim in contract law. Mr. Salt appealed to the Court of Appeal, seeking rescission of the contract. The court held that:

1. Rescission is the normal remedy: In cases of misrepresentation, rescission is the typical remedy, unless it's impossible.

2. Damages in lieu of rescission: Damages can only be awarded when rescission is a potential remedy.

3. Lapse of time: The passage of time is only a bar to rescission if it would be inequitable to grant rescission.

Outcome

The Court of Appeal ruled in favor of Mr. Salt, granting rescission of the contract. The court considered it equitable to grant rescission, despite the three-year delay, as most of the delay was due to Mr. Salt's lack of knowledge about the vehicle's true history.

Key Takeaways

1. Misrepresentation: The case highlights the importance of truthful representation in contract law.

2. Rescission: Rescission is the normal remedy for misrepresentation, unless impossible.

3. Damages: Damages can only be awarded when rescission is a potential remedy.

4. Lapse of time: The passage of time is only a bar to rescission if it would be inequitable to grant rescission.

Difference between 'Negligent Misrepresentation' and 'Fraudulent Misrepresentation'

Negligent Misrepresentation

A negligent misrepresentation occurs when some person represents that another party intends to deceive a third party but obtains that representation by some carelessness, recklessness, or a failure to exercise due diligence.

Key characteristics:

1. No intent to deceive

2. Carelessness or recklessness

3. No knowledge of the falsity of the statement

The key points of difference:

1. Intent: Negligent misrepresentation does not include an intent to deceive whereas fraudulent misrepresentation does.

2. Knowledge: The person guilty of negligent misrepresentation may not know that their information is false, whereas the person guilty of fraudulent misrepresentation is acting in full knowledge that the information they provide is false.

3. Consequences: On the whole, fraudulent misrepresentation is looked upon with far greater seriousness than negligent misrepresentation and usually results in much stiffer penalties, including damages or even criminal charges.

Difference between 'Deceit' and 'Fraudulent Misrepresentation'

Deceit

This is also known as intentional deceit. It arises when a person makes a false statement intentionally, knowing that the statement is false, with the intention of inducing the other party into taking action in reliance upon it.

Key elements:

1. Intentional false statement: The person who makes the statement knows that it is false.

2. Knowledge of falsity: The person who makes the statement knows that it is false.

3. Intent to deceive: The party making the statement willfully attempts to mislead the other party.

4. Reliance on the statement: The unsuspecting party relies upon the erroneous statement.

The key points of difference:

1. Scope: Deceit is a very specific form of intentional misrepresentation, while fraudulent misrepresentation is a more general term.

2. Intent: Deceit does require intent to deceive, while fraudulent misrepresentation requires an intent to deceive or to assure reliance.

3. Knowledge: Deceit requires knowledge of falsity, while fraudulent misrepresentation does not necessarily include knowledge.

Relevant Legislations

The Kerala Prevention Of Fraud Bill, 2020 seeks to punish anybody for providing, manufacturing, or developing any item for use in or with respect to any kind of fraud by way of either imprisonment or a fine or both. The bill states that if someone knowingly makes, adopts, or supplies an item for use in fraud, he is punishable up to five years in prison and with a fine.

What the bill proposes: The bill recommends the punishment for any act of developing an item or object or providing assistance to fraud. The punishment for each case, knowingly or willingly, for producing, developing, or providing aid to the scam can go up tp five years in prison and with payment of fine.

Conclusion

A fraudulent misrepresentation undermines good faith and fair dealing in the contract relations. The Indian Contract Act, 1872, presents a strong and pedestrian scheme against this deceit, thus giving sufficient remedies to the aggrieved party. Parties, by cultivating transparency, accountability, and vigilance in contractual dealings, will work to diminish the risks inherent in fraudulent misrepresentation that could jeopardize contract sanctity.