Misrepresentation and fraud
Contract I · Unit II · Topic 11 of 24 · 7 min read
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Cases checked to exist. Read the judgment before quoting a holding.
Every case cited here has been checked to exist — the citation resolves and names the right parties. The propositions attributed to each case have not been verified line by line against the judgment. Case names link through to the full judgment: read it before quoting a holding in an examination answer, and never carry a proposition from notes into court on trust.
1. Fraud: section 17
“Fraud” means 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 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.
Essentials, for an answer: (i) a representation or assertion of fact, not opinion or a statement of intention honestly held; (ii) made by a party to the contract or his agent; (iii) knowing it to be false or without belief in its truth; (iv) with intent to deceive or to induce the contract; (v) the other party was in fact deceived and acted on it; and (vi) he suffered loss. Mere puffing (“the best tea in town”) is not a statement of fact.
2. Derry v. Peek (1889)
The directors of a tramway company issued a prospectus saying the company had the right to use steam power. In fact the statute required the consent of the Board of Trade, which the directors assumed would be given as a formality. It was refused, the company was wound up, and a shareholder sued for deceit. The House of Lords held the directors not liable, because they honestly believed the statement. Lord Herschell's test: fraud is proved when a false representation has been made (1) knowingly, or (2) without belief in its truth, or (3) recklessly, careless whether it be true or false. An honest belief, however unreasonable, negatives fraud. Careless but honest statements fall under misrepresentation (and, after Hedley Byrne v. Heller, 1964, possibly the tort of negligent misstatement).
3. Silence: the Explanation to section 17
Mere silence as to facts likely to affect a person's willingness to enter into a contract is not fraud, unless:
- the circumstances are such that, regard being had to them, it is the duty of the person keeping silence to speak; or
- his silence is, in itself, equivalent to speech.
The illustrations set out the range: (a) A sells by auction to B a horse which A knows to be unsound; A says nothing. This is not fraud. (b) B is A's daughter and has just come of age; the relation between them makes it A's duty to tell her the horse is unsound. (c) B says to A, “If you do not deny it, I shall assume the horse is sound.” A says nothing; his silence is equivalent to speech. (d) A and B, traders, enter into a contract; A has private information of a change in prices which would affect B's willingness to proceed. A is not bound to tell B.
Contracts uberrimae fidei (of the utmost good faith) are the main class where the law imposes a duty to disclose: contracts of insurance (the insured must disclose all material facts within his knowledge), contracts for the purchase of shares on a prospectus, partnership, family settlements, and contracts between persons in a fiduciary relationship. A half-truth is also caught: a statement true as far as it goes but misleading because of what is left out amounts to a misrepresentation of fact.
4. Misrepresentation: section 18
“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 anyone claiming under him, by misleading another to his prejudice;
- (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.
Fraud and misrepresentation compared:
- Intent. Fraud requires intent to deceive; misrepresentation is innocent.
- Damages. Fraud is also the tort of deceit, so damages are available in addition to rescission. For innocent misrepresentation the remedy is rescission (with restoration under section 64), not damages.
- Silence. Fraud can be committed by active concealment or by silence where there is a duty to speak; misrepresentation needs a positive assertion or breach of duty.
- Ordinary diligence. The exception in section 19 applies to misrepresentation and to fraudulent silence, not to active fraud.
The Supreme Court applied the distinction between the character and the contents of a document in Ningawwa v. Byrappa, 1968 INSC 10, AIR 1968 SC 956. A woman was induced by fraud to sign a gift deed covering more land than she intended to give. Because she knew she was signing a gift deed, the fraud related to its contents, not its character, and the deed was voidable, not void. (Fraud as to the character of the document would make it void; see the note on mistake.)
5. Effects: section 19
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 whose consent was caused by fraud or misrepresentation may, if he thinks fit, insist that the contract be performed and that he be put in the position in which he would have been if the representations made had been true.
So the injured party has a choice: rescind (and return benefits under section 64), or affirm and claim to be put in the position promised. Rescission is lost if he affirms the contract after learning the truth, if third parties acquire rights for value in good faith, or if restoration has become impossible.
6. The exception: ordinary diligence
The Exception to section 19: if consent was caused by misrepresentation, or by silence fraudulent within section 17, the contract is nevertheless not voidable if the party whose consent was so caused had the means of discovering the truth with ordinary diligence. Illustration (b): A, by a misrepresentation, leads B to believe that 500 maunds of indigo are made annually at A's factory. B examines the accounts, which show only 400 maunds, and then buys. The contract is not voidable.
The Explanation: a fraud or misrepresentation which did not cause the consent does not render the contract voidable. Contrast illustration (a): A, intending to deceive B, falsely represents that 500 maunds of indigo are made annually at his factory and so induces B to buy it. That contract is voidable at B's option, because the false statement was active fraud and did cause the consent. Illustration (c): A fraudulently tells B that his estate is free from incumbrance; it is mortgaged. B may avoid the contract, or insist on its being carried out and the mortgage debt redeemed.
How this is examined
Typical essay: “Define fraud. When does silence amount to fraud?” or “Distinguish fraud from misrepresentation.” Quote section 17 in full, then the Explanation with the four horse illustrations, then Derry v. Peek, then section 19 and the exception. Short notes: Derry v. Peek; uberrimae fidei; the indigo illustration. A problem on the sale of an unsound horse or a house with hidden defects is answered from the Explanation to section 17.
Now try the real questions: Contract I past question papers.