Adblocker detected! Please consider reading this notice.

We've detected that you are using AdBlock Plus or some other adblocking software which is preventing the page from fully loading.

We need money to operate the site, and almost all of it comes from our online advertising.

Please add lawcorner.in to your ad blocking whitelist or disable your adblocking software.

×

Difference Between Fraud And Misrepresentation

Introduction

Contracts form a part of our daily lives. In fact, we come across so many contracts without even realising that we are a party to one. Activities such as purchasing goods from a store, getting automobiles serviced, installing applications on our mobile phones, etc., all are different forms of contracts, whether oral or expressed. But for the sake of ease of living, we do not always record every contract or reduce it into writing. Daily activities cannot be recorded regularly, but where formal contracts such as business dealings, exchange of large amounts of money, or purchase of expensive goods come into question, it is important to have recorded evidence of such transactions so that one is always aware of the terms and conditions with which both the parties to a contract are bound.

Contracts of a more formal nature, such as those required to be recorded, need to be present with certain elements, that will render the contract valid in entirety. Contracts in India are governed by the Indian Contract Act of 1872, and the Act lays down certain elements which form the basics of a contract, and without which, a contract would be void.

Section 10 of the Indian Contract Act states that the following elements are the essentials of a contract:

  1. An agreement between the two parties must exist, which will form the material of the contract, i.e. the basis on which the contract is to be entered into.
  2. The parties so entering the contract must be competent to do so.
  3. The agreement should be for a lawful object, and since a contract involves consideration of some kind, the agreement should have a lawful consideration.
  4. The parties to the agreement must give their consent to the agreement, and such consent must be free.
  5. The said agreement must not be expressly declared as void by the law.

One of the most important points here is that of free consent. Free consent does not mean that the parties merely agreed to enter into a contract without second thoughts. It represents the principle of consensus ad idem, which means that both the parties to the agreement must mean and agree to one and the same thing[1]. And as a matter of fact, consent of the parties is one such point where it becomes easy to affect the contract through altering the idea of free consent. If the consent to the contract is not free, the contract will be held voidable and will not be enforceable in a court of law.

For example, A offers to sell his goods of a particular quality to B. B, thinking that the goods belong to A, agrees to buy them, whereas in reality those goods are stolen by A from some place. Here, A and B are thinking of different goods and thus there is no consensus ad idem.

As per Section 14 of the Contract Act, free consent is defined as consent when it is free from the following factors:

  1. Coercion
  2. Undue Influence
  3. Fraud
  4. Misrepresentation
  5. Mistake

If consent is given under the apprehension of any of the abovementioned factors, such consent cannot be termed as free. A consent given in furtherance of any of the abovementioned factors is not free consent.

For example, if A intentionally hides certain important terms of a contract from B while entering into a contract with him, such contract would be voidable at the option of B because the consent of B has been obtained through misrepresentation, i.e. after concealing certain elements of the contract.

Fraud And Misrepresentation

Fraud and misrepresentation may seem synonymous, but their meaning and application are very different. Both constitute different kinds of wrong, even though the effect of both is that the consent obtained through fraud or through misrepresentation would render the contract voidable. Since consent of the parties is one of the most important aspects of a contract, it is essential that consent to the agreement be obtained without the presence of any such factors vitiating consent, which includes fraud as well as misrepresentation.

Both, fraud and misrepresentation, imply that some part of the agreement was either false or fabricated, or concealed, deliberately, in order to put the other party at a disadvantage or to put oneself at an advantage. The idea behind exercise of fraud or misrepresentation is to put another person in a false apprehension of facts, to which the agreement is related, because the actual facts are those upon which that person may not agree. Thus, the main purpose is to put the other party under false promises, which can also include the breach of some duty or the deliberate failure to perform a promise, and acts like these do not allow the principle of free consent to be applied.

For a comprehensive distinction between fraud and misrepresentation, it is important to define the two separately.

Fraud

Section 17 of the Indian Contract Act, 1872, defines fraud as several acts which are performed by either the party to the contract, or with his connivance, or through his agent, with the intention of deceiving the other party, or to make the other party consent to the contract. The acts include –

  1. Any suggestion stated as a fact which is untrue, and the person stating it knows that the suggestion is untrue
  2. Any fact concealed by a person who knows or believes such a fact
  3. Any promise made by a person without his/her intention of performing it
  4. Any other act which is fit to deceive a person
  5. Any act or omission which is expressly declared by law as a fraud

The explanation to this section states that mere silence to certain facts which would affect the likeliness of a person to enter into a contract is not fraud, but it would become fraud if the person remaining silent has a duty to speak, or if his/her silence is equivalent to speech itself.[2]

For example, A takes some amount of money from B after promising him to return it back, but without having the intention to do so. A has committed fraud with B.

But, if A auctions a horse to B knowing it to be unsound, but does not reveal the unsoundness of the horse to B, A has committed no fraud. If A is related to be such that it becomes the duty of A to reveal the horse’ unsoundness, then A would commit fraud if he does not do so.

Fraud takes place when one person actively conceals a fact or certain facts from the other, but himself knows those facts to be true and existing. To prove that fraud has taken place, it is necessary to show that the party who concealed such fact has knowledge of it. Mere ignorance of a fact which later on came to be known as the truth will not amount to fraud. Also, concealment should be of a fact, and not an opinion, though in some cases opinions may be treated as facts.

Active concealment of a fact means that such fact, which ought to be revealed by the party, is concealed or hidden, and the contract in this case would be voidable at the option of the party from whom the fact was concealed. The party concealing the fact might be liable for civil wrong and fine in lieu of the same. It is not necessary that the party should definitely be aware of the fact being untrue[3], because we are only concerned with the effect fraud has on the element of consent.

Misrepresentation

Misrepresentation, as defined under Section 18 of the Contract Act, means and includes the following –

  1. A positive assertion which is not true, made by a person who, however, believes it to be true
  2. A breach of a duty, although without the intention to deceive, but such breach results in an advantage to the person committing the breach, to the prejudice of another, or to those claiming under them
  3. Causing the other party to make a mistake as to something which is the substance of the agreement, however, innocently

Misrepresentation is the giving of inaccurate information by one party to the other, in an agreement, before the contract is formed, and such inaccurate information actually becomes a mode of inducing the other party to enter into a contract. The major point to be noted here is that this inaccurate information is thought to be believed accurate, by the party who is responsible for giving out the information. i.e. the party not only wants the other party to believe it, but he/she himself/herself believes it too. Such statements presenting incorrect facts are unwarranted, which implies that they are made without any legitimate source, and are taken to be true without any speculation. If a contract is entered into on the basis of misrepresentation, the party against whom such misrepresentation has been made can not only avoid the contract but can also sue for damages.[4]

For example, A auctions a horse to B, and assures B that the horse is of excellent vigour, and this assertion is held by A to be true. On the same assertion, B takes the horse from A, but later comes to know that the horse is unsound. Here, A has committed misrepresentation.

Breach of duty occurs when a party had had some duty in respect to the agreement, but it is failed to be performed. Such as, if a party does not act in a reasonable manner to prevent some foreseeable event from happening, the duty of care is breached. This was stated vividly in Vaughan v. Menlove[5], which introduced the test of ‘reasonable person’, and it was held that if a person acts below the reasonable standard, a breach of duty is achieved.

The mistake committed under misrepresentation is that of a fact. It happens when both the parties are unaware of the reality of a fact and are misled because of it. Since a mistake is committed innocently, the contract can be rendered either voidable or void.

Difference Between Fraud And Misrepresentation

The major difference between fraud and misrepresentation is that when a person commits fraud, a fact which is actually false is made true by a party, while the party is aware of the fact being false, whereas in misrepresentation, the party asserting the fact believes it to be true, when actually it is not.[6] The main factor is that of intention, which, though, exists in fraud, is absent in misrepresentation. Since fraud includes intention, the party against whom fraud is committed has a right to sue, and this right is not available to a party subject to misrepresentation only.

The intention to deceive is essential, and in both cases of fraud and misrepresentation, the contract can be avoided. But where a party is subject to fraudulent silence or misrepresentation, and possessed the means to discover the true fact(s) by exercising ordinary diligence, the contract cannot be avoided.

Fraud is a deliberate making of a misstatement, whereas misrepresentation is the innocent making of a misstatement. In both cases, the consent to the party is vitiated, but in the former, the intention to vitiate the consent was present, so that the party could be induced to enter into the contract, however, in the latter, there was no intention on part of the party making the misrepresentation to induce the other party. Misrepresentation is basically a bona fide representation of a fact which is untrue.

FAQs on Difference Between Fraud And Misrepresentation

Can a Party sue for damages in misrepresentation?

A party cannot sue for damages in misrepresentation because the intention to deceive the party was absent, and as such, it was only a mistake on part of the party that is responsible for misrepresentation.

What is the fundamental point of difference between fraud and misrepresentation?

Intention is the most important point of difference between fraud and misrepresentation. In both cases, the consent to the party is vitiated, but in fraud, the intention to vitiate the consent is present, so that the party could be induced to enter into the contract, however, in misrepresentation, there is no intention on part of the party making the misrepresentation to induce the other party.

In which circumstances an affected party can neither sue for damages nor avoid the contract?

A party affected by either fraud or misrepresentation cannot avail damages and nor can it avoid the contract if and when the party so affected had the means to discover the actual facts of the transaction, which had been altered by the other party, either through fraudulent silence or misrepresentation. Such a duty should exist under ordinary course of circumstances and must be exercisable through ordinary diligence.

[1] The Indian Contract Act, 1872 (Act No. 09 of 1872), s. 13.

[2] Chartered Bank of India, Australia and China v. Imperial Bank of India, AIR 1933 Cal 366.

[3] Evans v. Edmonds, (1853) 13 CB 777.

[4] Richview Construction Co. v. Raspa, (1975) 11 ONTARIO reports (2d) 377.

[5] (1837) 132 ER 490 (CP).

[6] Rattan Lal Ahluwalia v. Jai Janinder Prasad, AIR 1976 P H 200.

Note – The information contained in this post is for general information purposes only. We try our level best to avoid any misinformation or abusive content. If you found any of such content on this website, please report us at info@lawcorner.in

Interested to publish your article on our website? Click Here to submit your article.

Zara Suhail Ahmed

Zahra is a student at Aligarh Muslim University, pursuing a 5-year B.A. LLB course. Currently in her 4th year, Zahra opted for Law after completing most part of her schooling from Cambridge School, New Delhi. Zahra has interned under a few lawyers and firms, participated in various moot courts and similar events, and is proficient in research and written content. A strong believer that education is the greatest virtue, Zahra seeks to learn from every platform and individual, whether working alone or as a team. Although Zahra is keenly interested to pursue ADR (Alternate Dispute Resolution) as a career, she has kept her options open and is interested in examining the different career prospects that her profession has to offer. Zahra has diversified interests apart from her professional life as well. Not only a successful lawyer, but she also aspires to become a productive human being.

KUKUFM 2