MISREPRESENTATION, FRAUD, MISTAKE

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This Article is written by Mohd Hussain Khatri of VES College of Law, an intern under Legal Vidhiya

Abstract

Misrepresentation, fraud and mistake are terms often used interchangeably but have distinct meanings and implications. Misrepresentation refers to the act of providing false or misleading information that induces someone into a contract or agreement. Fraud, on the other hand, involves intentional deception, usually with the aim of personal gain and causing harm to another party. Mistake refers to an error or misunderstanding that affects the formation or performance of a contract. It’s essential to comprehend these concepts to navigate legal and contractual landscapes effectively.

Keywords: Misrepresentation, Fraud, Mistake, Indian Contract Act, Compensation

Misrepresentation

Misrepresentation encompasses a broad range of actions where one party either knowingly or unknowingly makes false statements or conceals facts to influence the other party’s decision. There are three types of misrepresentation: innocent, negligent, and fraudulent. Innocent misrepresentation occurs when the person making false statements genuinely believes them to be true. Negligent misrepresentation happens when someone fails to exercise reasonable care in verifying the accuracy of the information provided. Fraudulent misrepresentation involves intentional deceit, with the aim of inducing another party into an agreement.

Section 18 of the Indian Contract Act, 1872¹ deals with “misrepresentation.” It states that a misrepresentation occurs when one party makes a false statement or gives misleading information to another party, inducing them to enter into a contract. The party affected by the misrepresentation can rescind the contract and seek compensation for any losses suffered as a result.

Instances of misrepresentation can be found in various contexts, such as real estate transactions, product advertisements, employment contracts, and more. For example, a seller might misrepresent the condition of a property, or a company might exaggerate the benefits of their product. Such actions can lead to financial loss, legal disputes, and damaged relationships.

Fraud

Fraud is a deliberate act of deception, where one party intentionally misrepresents facts, conceals information, or manipulates situations to gain an unfair advantage over another party. To prove fraud, certain elements must be present, including the fraudulent party’s intent, a material misrepresentation, justifiable reliance by the victim, and resulting damages. Common types of fraud include securities fraud, insurance fraud, identity theft, and online scams.

Section 17 of the Indian Contract Act, 1872 defines “fraud” and outlines its consequences. According to this provision, fraud involves the intentional misrepresentation of a fact or the active concealment of a fact by one party with the intent to deceive another party. If fraud is established, the affected party has the right to void the contract and seek legal remedies.

1 Indian Contract Act, 1872; Act No. 9 of 1872

2 Ibid

Fraudulent activities can have severe consequences, both financially and legally. Victims may suffer significant financial loss, reputational damage, emotional distress, and other hardships. Therefore, it is crucial to be vigilant and take preventive measures to minimize the risk of falling victim to fraudulent schemes.

Mistake

Mistake refers to an error or misunderstanding made by one or both parties during the formation or performance of a contract. There are two types of mistakes: unilateral and mutual. A unilateral mistake occurs when only one party is mistaken about a particular term or condition of the contract. In such cases, the mistaken party may seek relief if the other party had reason to know about the mistake. Mutual mistake, on the other hand, happens when both parties are mistaken about the same fundamental fact, rendering the contract voidable.

Section 20 of the Indian Contract Act, 1872³ addresses the concept of “mistake.” It states that a contract is void if both parties enter into it based on a mutual mistake of fact. However, if only one party is mistaken, and the other party is aware of the mistake, the contract remains valid. If the mistake is unilateral and the non-mistaken party exploited the mistake, it may be grounds for the affected party to seek legal remedies.

Mistakes can have significant implications on contractual obligations. They may result in disputes, breaches of contract, and legal proceedings. It is essential to carefully review and understand the terms and conditions of any agreement to avoid potential mistakes that could lead to undesirable outcomes.

While misrepresentation, fraud, and mistake share some similarities, there are crucial differences that set them apart. Misrepresentation involves providing false information, whether intentional or not, to influence another party. Fraud, on the other hand, requires intentional deception and a fraudulent party seeking personal gain at the expense of another. Mistake, however, refers to errors or misunderstandings made by one or both parties during the formation or performance of a contract.

In Indian law, misrepresentation can invalidate a contract if it meets certain conditions, such as being a material misrepresentation, inducing the other party to enter into the contract, and causing harm or loss to the aggrieved party. Whereas, fraud is considered a serious offense and can lead to civil and criminal consequences. To prove fraud, certain elements must be established, such as a false representation, knowledge of its falsity, intent to deceive, and the other party’s reliance on the false representation. And, mistake can render a contract voidable if it relates to a fundamental aspect of the contract and is not due to negligence or carelessness of the mistaken party. However, certain types of mistakes, such as mistakes of law, may not be recognized as valid grounds for avoiding a contract.

Case Study: Real Estate Misrepresentation

Ansal Properties & Infrastructure Ltd. (APIL),¹ a real estate developer, entered into an agreement with the State of Haryana to develop a residential complex. APIL obtained necessary approvals from the government authorities based on the representations made by them regarding the availability of essential infrastructure, such as water supply, electricity, and sewerage facilities.

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3 Supra 1

4 Ansal Properties & Infrastructure Ltd. vs State Of Haryana And Ors on 29 April, 2015

However, after the agreement was signed, APIL failed to fulfil its obligations to provide these facilities as represented. The State of Haryana initiated legal proceedings against APIL, alleging misrepresentation and breach of contract. The state argued that APIL had made false representations about the availability of essential infrastructure to secure the necessary approvals. The case was heard by the Punjab and Haryana High Court. The court held that APIL had indeed made false representations regarding the provision of essential infrastructure. The court noted that the representations made by APIL were material factors that induced the state to enter into the agreement. The court relied on Section 18 of the Indian Contract Act, 1872, which deals with the effect of misrepresentation on a contract. It stated that when a party to a contract has been induced to enter into the contract by the misrepresentation of the other party, the contract is voidable at the option of the party who was misled. The court concluded that the misrepresentation by APIL had influenced the state’s decision to enter into the agreement. As a result, the court declared the agreement voidable and directed APIL to refund the consideration received from the state along with interest.

Case Study: Fraudulent Investment Scheme

The case of Sahara India Real Estate Corporation Ltd. and Ors. v. SEBI revolves around an alleged fraudulent investment scheme conducted by the Sahara group of companies. The Sahara group, a prominent business conglomerate in India, was accused of raising funds from the public through illegal and unregistered investment schemes.

The Securities and Exchange Board of India (SEBI),² the regulatory authority responsible for overseeing the securities market in India, initiated an investigation into the Sahara group’s activities. SEBI alleged that the group was involved in raising billions of dollars from investors through optionally fully convertible debentures (OFCDs) without complying with the necessary regulatory requirements.

SEBI, based on its investigation, issued a show-cause notice to Sahara India Real Estate Corporation Ltd. and Sahara Housing Investment Corporation Ltd., two entities of the Sahara group, alleging violations of securities laws and seeking repayment of the funds collected from investors.

The case was eventually brought before the Supreme Court of India for adjudication. The court extensively examined the legality of the investment scheme, the regulatory obligations of the Sahara group, and the protection of investors’ interests.

On August 31, 2012, the Supreme Court of India delivered its judgment in the Sahara case. The court ruled in favour of SEBI, holding that the Sahara group had violated securities laws and regulations by raising funds from the public through OFCDs without obtaining the necessary approvals or making the required disclosures.

The court directed the Sahara group to refund the funds collected from investors, along with applicable interest, through SEBI. The court also ordered the appointment of a designated SEBI committee to oversee the refund process and ensure compliance with the court’s directions.

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5 Sahara India Real Estate & Ors. vs Securities & Exch.Board Of India & Ors. on 11 September, 2012

Furthermore, the court-imposed penalties on the Sahara group for non-compliance with the securities laws. It highlighted the importance of investor protection and emphasized the need for strict adherence to regulatory norms in fundraising activities.

Legal Remedies

Civil Lawsuits: Victims can file civil lawsuits seeking compensation for the damages suffered due to misrepresentation or fraud. They can approach the appropriate civil court and present their case, providing evidence of the misrepresentation or fraud committed against them.

Consumer Protection Act: The Consumer Protection Act, 2019, provides a legal framework for consumers to seek redress for unfair trade practices, misleading advertisements, and deficient services. Victims can file complaints before the appropriate Consumer Disputes Redressal Forum seeking compensation and other reliefs.

Criminal Complaints: If the misrepresentation or fraud involves criminal activities, victims can file a complaint with the police. The police will investigate the matter, and if sufficient evidence is found, they can initiate criminal proceedings against the accused.

Economic Offenses: In cases of serious financial fraud or white-collar crimes, victims can approach specialized agencies such as the Serious Fraud Investigation Office (SFIO) or the Economic Offenses Wing (EOW) of the police. These agencies have the expertise to investigate complex financial frauds and take appropriate legal action.

Arbitration and Mediation: In some cases, parties may choose to resolve their disputes through arbitration or mediation. These alternative dispute resolution methods provide a more informal and less adversarial process for resolving conflicts. Parties can agree to appoint a neutral third party to facilitate negotiations and reach a mutually acceptable resolution.

Conclusion

Misrepresentation, fraud, and mistake are complex concepts that have significant implications on legal and contractual matters. Understanding these concepts is vital for individuals, businesses, and legal professionals to protect themselves from potential harm, financial loss, and legal consequences. By being vigilant, conducting due diligence, seeking professional advice, and adopting preventive measures, you can navigate contractual relationships and transactions with confidence. Remember to always prioritize transparency, honesty, and clarity to avoid misrepresentation, fraud, or mistake.

References