Misrepresentation under Section 18 of the Indian Contract Act, 1872: The Three Kinds, the Effect under Section 19, and the Exception Where the Party Had Means of Discovering the Truth

Misrepresentation is fraud without the guilty mind. The representor believes what he says and is nonetheless wrong, and the law allows the misled party to escape the contract because his consent was obtained on a false basis. Section 18 identifies three kinds, and Section 19 supplies the consequence together with an exception that has no counterpart in the law of active fraud: the contract is not voidable if the misled party had the means of discovering the truth with ordinary diligence. This topic works through the three kinds, the remedy, and the reach of that exception.

1. The Definition

The unifying feature is the absence of intent to deceive. Clause (2) says so in terms, clause (1) requires belief in the truth of the assertion, and clause (3) uses the words 'however innocently'. Where the intent to deceive is present, the case falls under Section 17 and is fraud.

2. The Three Kinds

2.1 Positive assertion not warranted by the information

Clause (1) requires four things: a positive assertion, of a fact, which is not true, made in a manner not warranted by the information of the person making it, though he believes it true. The fourth element does the work. A person who repeats something he has been told by a source he has no reason to doubt, and states it as a fact of his own knowledge, asserts in a manner not warranted by his information even though he honestly believes it.

• The statement must be of fact. An expression of opinion is not a representation of fact, though a statement of opinion by a person who knows the facts may carry an implied assertion that he knows facts justifying it.
• A statement of law is not ordinarily a representation of fact, though a misstatement of a private right, such as the existence of a particular title, is treated as one of fact.
• Mere commendation is not a representation. Sales talk and general praise of goods are not assertions of fact, provided they remain general and do not descend to specific claims.
• Silence is not a positive assertion. Non-disclosure may amount to fraud under the Explanation to Section 17 where a duty to speak exists, but it is not misrepresentation under clause (1).

2.2 Breach of duty without intent to deceive

Clause (2) covers what English law treats as constructive fraud. It requires a breach of duty, the absence of an intent to deceive, and the gaining of an advantage by misleading the other party to his prejudice. The clause catches the case where a party who owed a duty to disclose or to be accurate fails in it innocently. Its most frequent application is to contracts of utmost good faith, where the duty to disclose exists independently, and to representations that were true when made and have since become false.

2.3 Causing a mistake as to the substance of the subject matter

Clause (3) operates even where no statement was made at all. It is enough that one party has, however innocently, caused the other to make a mistake as to the substance of the thing which is the subject of the agreement. The word substance limits the clause: a mistake as to a quality that does not go to the essential character of the subject matter is not within it, and a mistake as to value is expressly excluded by the Explanation to Section 20.

The relationship with Section 20 should be kept in mind. Where both parties are under a mistake as to a matter of fact essential to the agreement, Section 20 makes the agreement void. Where one party has caused the other's mistake as to the substance of the subject matter, clause (3) of Section 18 applies and the contract is voidable at the instance of the misled party.

3. Effect: Section 19

3.1 The two options

Section 19 gives the misled party a choice rather than a single remedy. He may rescind, in which case Section 64 requires him to restore any benefit received and relieves the other party from performing; or he may affirm and insist on performance, requiring that he be put in the position he would have occupied had the representation been true. The second option is valuable where the contract is still advantageous and the representation can be made good, for instance where a seller represented that land was free of an encumbrance that can be discharged.

3.2 The Explanation: causation

The Explanation confirms what the closing paragraph of Section 14 already implies. A misrepresentation that did not cause the consent does not make the contract voidable. Three situations fall outside the section on this ground: where the misled party knew the truth; where he did not rely on the statement, having made his own investigation and acted on its result; and where the statement was not material, in the sense that it would not have influenced a reasonable person in his position.

4. The Means-of-Discovery Exception

The exception is the most distinctive feature of Section 19 and its scope must be stated precisely. It applies to misrepresentation and to silence amounting to fraud. It does not apply to active fraud by a positive false statement. The reason is one of policy: a person who has been lied to is entitled to rely on the lie, and it is no answer for the liar to say that his victim could have checked.

The exception protects against misrepresentation and silence, never against a lie

5. Loss of the Right to Rescind

1. Affirmation. Where the party, with full knowledge of the facts entitling him to rescind, expressly affirms the contract or acts in a manner consistent only with its continuance.
2. Lapse of time. Unreasonable delay after discovery is evidence of affirmation and may bar relief independently, the remedy being equitable in origin.
3. Restitution impossible. Section 64 requires the party rescinding to restore the benefit received. Where the subject matter has been consumed, altered in character or resold so that restoration is impossible, rescission is not available.
4. Third-party rights. Where a third party has acquired an interest in the subject matter for value and in good faith before avoidance, the contract can no longer be rescinded as against him.

6. Fraudulent Silence and the Contract

Silence is not misrepresentation under Section 18, since each of the three clauses requires either a positive assertion, a breach of duty, or an act causing a mistake. Silence is addressed instead by the Explanation to Section 17, under which mere silence is not fraud unless there is a duty to speak or the silence is equivalent to speech. Where fraudulent silence is established, Section 19 applies, and the exception is expressly extended to it, so a party who had the means of discovering the truth with ordinary diligence cannot rescind on that ground.

7. The Position Stated Shortly

1. Section 18 has three limbs and all of them require the absence of an intent to deceive.
2. Clause (1) requires a positive assertion of fact, untrue, made in a manner not warranted by the maker's information, though he believes it true.
3. Clause (2) covers a breach of duty which innocently misleads and gains an advantage, and reaches a representation that has become false before the contract is made.
4. With v. O'Flanagan: a representation continues until the contract is concluded, and a change must be disclosed.
5. Clause (3) covers innocently causing a mistake as to the substance of the subject matter, which makes the contract voidable rather than void.
6. Section 19 gives the misled party the option to rescind or to insist on performance as if the representation had been true.
7. The Explanation excludes a misrepresentation that did not cause the consent.
8. The means-of-discovery exception applies to misrepresentation and fraudulent silence, and never to an active fraudulent misstatement.
9. Redgrave v. Hurd: a representee need not investigate, and an opportunity to discover the truth is narrower than the means of discovering it with ordinary diligence.
10. The right to rescind is lost by affirmation, delay, impossibility of restitution, or the intervention of third-party rights.

8. Related Topics and Provisions