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Unit 4: Free Consent

(ii) A company issued a prospectus giving false information about the unbounded wealth of Notes
Nevada. A person buys shares on the faith of such an information. Later he wants to avoid
the contract. He can avoid the contract since the false representation in the prospectus
amounts to fraud (Reese River Silver Minning Co. v Smith (1869) L.R. 4 H. [664]).
Consequences of fraud and misrepresentation [s.19]. The party aggrieved or wronged has two
remedies viz, (i) he can avoid the performance of the contract (ii) he can insist that the contract
shall be performed and that he shall be put in the position in which he would have been if the
representation made had been true. In case of fraud, he has an additional remedy, i.e., he can sue
for damages.
Exceptions to the principle that the party aggrieved or wronged by misrepresentation cannot
claim damages. The directors of a company are liable in damages under s.62 of the Companies
Act, 1956, even for misstatements, i.e., misrepresentation in the prospectus issued by the company

inviting public for subscription. Also where there exists a confidential relationship between the
parties (such as solicitor and client), and negligent representation is made by one to the other
then the aggrieved party may claim damages.
Fraud and misrepresentation. The following are the points of difference between the two:
1. In case of fraud, the party making false or untrue representation makes it with the intention
to induce the other party to enter into a contract. Misrepresentation, on the other hand, is
innocent i.e., without any intention to deceive or to gain an advantage.
2. Both fraud and misrepresentation make a contract voidable at the option of the party
wronged. But in case of fraud, the party defrauded gets the additional remedy of suing for
damages caused by such fraud. In case of misrepresentation, generally, the only remedies
are rescission and restitution.
3. In case of fraud, the defendant cannot take the plea that the plaintiff had the means
of discovering the truth or could have done so with ordinary diligence. In case of
misrepresentation, it could be a good defense.
Cases of fraud or misrepresentation in which the contract is not voidable. There are two
exceptions to the principle that the party aggrieved or wronged can avoid the contract. Firstly,
where the party whose consent was caused by fraud or misrepresentation had the means of
discovering the truth with ordinary diligence. Secondly, where the party after becoming aware of
the fraud or misrepresentation takes a benefit under the contract or in some way affi rms it.

4.6 Meaning of ‘Mistake’ [Ss.20-21]

Mistake may be defined as an erroneous belief on the part of the parties to the contract concerning

something pertaining to the contract. For example, A agrees to buy from B a certain house. It

turns out that the house had been destroyed by fire before the time of the bargain though neither
party was aware of the fact. The agreement is void. A cannot insist for possession of the house.
The agreement is void as there is a mistake on the part of both the parties about the existence of
the subject matter.
Different kinds of mistake. Broadly, there are two kinds of mistake: (i) Mistake of fact and (ii)
Mistake of law. Further mistake of fact may be either: (a) Bilateral or (b) Unilateral. The mistake
of law may be (a) mistake of law of the land and (b) mistake of foreign law. When both the parties
to the agreement are under a mistake of fact essential to the agreement, the mistake is called a

bilateral mistake and the agreement is void. For example, A agrees to sell to B a specific cargo of
goods supposed to be on its way from London to Mumbai. It turns out that before the day of the
bargain the ship conveying the cargo had been cast away and the goods lost. Neither party was
aware of the facts. The agreement is void.
Some typical cases of bilateral mistake invalidating the agreement. There may be a mistake
concerning subject matter as to its (i) existence, (ii) identity, (iii) title, (iv) quantity, (v) price.

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