1

LIABILITY UNDER MISSTATEMENT-RAJ KRISHNA

INTRODUCTION AND RESEARCH METHODOLOGY

RESEARCH OBJECTIVES: The research objectives are as follows:

1. The researcher tends to find the number of ways in which a person can be held liable for
misstatement.

2. The researcher wants to examine the essentials for misstatements.

3. The researcher wants to look at the decisions taken by court for those held under
misstatement.
4. The researcher wants to examine the important cases which helped in framing laws for
misstatement.
5. The researcher tends to examine the impact of these laws in the modern time.

RESEARCH QUESTIONS: The research questions are as follows:

1. In how many ways a person can be held liable for misstatements?

2. What are the essentials required to prove that someone is liable for misstatement?

3. Which type of action is taken by court for those liable under misstatement?
4. Which all cases helped in framing laws for misstatement?
5. What is the impact of these laws in modern times?

HYPOTHESIS: Duty of care do not make a negligent misstatement. It could exist apart from
contract or other fiduciary relationship.

LIMITATIONS: There could have been a large number of topics being included. But, the
researcher had included limited things which are important.

RESEARCH METHODOLOGY: The researcher had done doctrinal method of research.

SOURCES OF DATA: The researcher had consulted both primary and secondary sources to
complete the project.
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1. PRIMARY SOURCES: Primary sources include all the bare acts and statutes passed to
deal with the cases of misstatement.

2. SECONDARY SOURCES: Secondary sources include all the books and websites which
the researcher consulted while making project on “Liability for Misstatement”.

MODE OF CITATION: The researcher had followed a uniform mode of citation.

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INTRODUCTION

Misstatement is the one of the most common torts committed by individuals in day to day life.
Misstatement as a concept has a very large domain. The liability of a person arises in three
different ways for false statements made by him.

1. Liability for deceit or fraud: When a person knowingly makes a false statement of fact
due to which other person suffers loss is called deceit or fraud.

2. Liability for Negligent Misstatements: If the statement has been made honestly but
negligently i.e., without caring to see whether the same is true or not.

3. Liability for Innocent Misrepresentation: When a person makes a false statement

without any intention to deceive is called Innocent Misrepresentation. Usually a person is
not held liable for innocent misrepresentation.

There are many cases on misstatements filed earlier in the 19th and 20th century. The
judgments given on these cases helped in framing laws on misstatements. The court has
also given certain criteria’s to check whether someone is liable for misstatement or not1.
Therefore these guidelines have to be very much followed while dealing with the cases of
misstatements because it includes a very large domain.

1
Dr. R.K. Bangia, Law of Torts, Allahabad Law Agency, Allahabad
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DECEIT OR FRAUD

The wrong of deceit consists in willfully making a false statement with intent to induce
the plaintiff to act upon it and is actionable when the plaintiff suffers damage by acting
upon the same.

The following essentials are required to be proved in an action of deceit:

1. The defendant made a false representation or statement.
2. The defendant knew that the statement is false or at least did not honestly believe it to
be true.
3. The statement was made with an intention to deceive the plaintiff.
4. The plaintiff acted upon the statement and suffered damage in the consequences.

1. False Statement of Fact:

There must be a false statement of fact to make the defendants liable for fraud. Generally,
to constitute fraud, a positive statement of fact is required. A statement may be made by
word or conduct. Sometimes a conduct of the person may lead another person to believe
that certain state of facts exists.

CASE: R v. Barnard2 - A person put on a cap and a gown without having a right to do so
to create an impression that he was the member of University in order to obtain goods on
credit. It was held that such conduct amounted to fraud.

MERE SILENCE: To constitute fraud, the defendant should make a positive false
statement of fact. A mere non-disclosure of the truth or mere silence as to certain facts
does not amount to fraud.

2
(1837) 7C& P.784
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ILLUSTRATION: If I sell my horse which is unsound, I need not tell the buyer about the
fact. Mere non-disclosure of defects in the horse will not constitute the fraud.

CASE: Sri Krishan v. Kurukshetra University3 - Sri Krishan, who was a candidate for the
LL.B. Part 1 examination of the Kurukshetra University, was short of the required
attendance. He did not mention this fact in the examination form. Neither the Head of
Department of Law nor the university authorities could discover this fact, as they did not
make proper scrutiny of the form. It was held by the Supreme Court that there was no
fraud by the candidate, and the University had no power to withdraw his candidature on
that ground.

However in the following exceptional cases, mere non- disclosure of the complete facts
may constitute fraud:

1. When there is a duty to speak- Sometimes, there may be duty to disclose full facts. In
such a situation, one is not supposed to be silent. If a person deliberately keeps silent
in order to create a false impression in the mind of the other, it would be fraud.

CASE: Kiran Bala v. B.P. Srivastava4: The first marriage of the appellant, Kiran
Bala had been annulled on the ground of her unsoundness of mind at the time of that
marriage. This fact was not disclosed either by the girl or her parents to the
respondent, B.P. Srivastava, to whom the girl was married the second time. It was
held in such a situation, it was the duty of the girl or her parents to disclose that fact at
the time of second marriage. The consent of the bridegroom having been obtained by
fraud, the second marriage was, therefore, annulled by a decree of nullity under
Section 12(1) (c) of the Hindu Marriage Act.

3
A.I.R. 1976 S.C. 376.
4
A.I.R. 1982 All. 242
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2. If a person makes a statement believing the same to be true but subsequently

discovers that it was false, he has a duty to correct that statement. Similarly, when the
statement which was true when made, becomes false subsequently, a duty to disclose
the truth arises. If such a statement remains uncorrected and the plaintiffs suffer loss
by acting upon it, the defendant would be liable for fraud5.

3. Speaking only half truth may be considered to be fraud as regards the other part in
respect of which there is non-disclosure. When a part of the facts are disclosed and
the other part withheld with a view to convey a false impression, the same is
actionable as fraud6.
4. Active concealment of defects means a false statement regarding the defects which
are concealed. Thus, if defects in the goods sold are covered in a way that the buyer is
not able to detect them, this is equivalent to making a statement that those defects are
not there7.

To constitute fraud, the statement of fact must be false. Fraud cannot be committed by making a
true statement when acted upon by the plaintiff proves detrimental to him.

CASE: Ward v. Hobbs8: The seller knowing that the pigs which were being sold by him were
suffering by typhoid fever did not disclose this defect to the buyer. He however, mentioned that
the pigs were being sold “with all faults”. The disease was transmitted to the other pigs of the
buyer also and many of them died due to that. It was held that there was no false statement on
which the buyer could have been deemed to relied, and he had purchased the pigs “with all
faults” i.e., at his own risk, and, therefore, the seller was not liable for fraud.

5
Bries v. Woolley, (1954) A.C.333
6
Arkwright v. Newbold,(1881) Ch. D. 301, 318, per James, L.J.
7
Schneider v. Heath, (1813), 3 Camp. 506; Horsfall v. Thomas, (1862) 1 H & C 90.
8
(1878) 4 A.C. 13.
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2. Knowledge about the falsity of the statement:

To make the defendant liable, it has to be proved that the defendant either knew that the
statement is false or did not believe in its truth. An honest man cannot be considered to be
fraudulent. Therefore, if the defendant honestly believes that the statement is true, there
can be no deceit. Mere negligence in making a false statement will not make a person
liable for deceit.

CASE: Derry v. Peek9 -

Facts
The Plymouth, Devonport and District Tramways Company’s prospectus stated that the
company had permission to use steam trams, rather than horse powered ones. In fact, it did
not because the right to use steam power was subject to the Board of Trade's consent. The
company applied, honestly believing that they would get it because permission was a mere
formality. In fact, after the prospectus was issued, they did not get permission.
Shareholders, represented by Sir Henry Peek, who had purchased their stakes in the
company on the faith of the statement, sued when the company's business ended up in
liquidation
.
Judgment
The shareholders' action failed because it was not proved that the director lacked honest
belief in what they had said. Lord Herschell, however, pointed out that although
unreasonableness of the grounds of belief is not deceitful, it is evidence from which deceit
may be inferred. There are many cases,
"Where the fact that an alleged belief was destitute of all reasonable foundation would
suffice of itself to convince the court that it was not really entertained, and that the
representation was a fraudulent one."

9
(1889) 14 A.C. 337, at 374.
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3. Intention to deceive the plaintiff:

The defendant must make the representation with an intention that the plaintiff should rely
and act upon the representation. If the defendant knows or has reason to belief that the
statement which he is making to A may be acted upon by B, he will be liable to B even
though he had made statement to A only.

CASE: Langridge v. Levy10 –

FACTS:
 The Plaintiff [Langridge] received a gun from his father. His father bought the gun from
the Defendant [Levy].
 The Defendant told the Plaintiff's father the gun was of high quality.
 The Defendant was told that the gun was for the use of the Plaintiff.
 The gun was defective, exploded and blew off the son's hand.

JUDGEMENTS:

 Can't sue in contract, because there was no privity between the plaintiff and the
defendant.
 The plaintiff’s argument is rejected in favor of the defendant’s argument that the
imposition of such a duty of care would open the floodgates and allow for indeterminate
and infinite liability.
 However, there was a false representation here that the gun was safe, and that is fraud.
 The damage from the fraud is not remote and consequential, but easily foreseeable by the
Defendant - the Defendant knew that the gun was to be used by the Plaintiff. He sold the
gun for the purpose.
o For that reason, the Plaintiff is allowed to sue in fraud.
 The Plaintiff wins on the basis of fraud.

10
(1837) 2 M & W. 519
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4. The Plaintiff must be actually deceived:

There is no fraud until the plaintiff has been actually misled by acting on the statement
and has suffered damage.

CASE: Horsfall v. Thomas11 –

The claimant purchased a gun which had a concealed defect. His action for
misrepresentation failed as he hadn't inspected the gun before purchasing it. Therefore the
misrepresentation did not induce him to enter the contract as he was unaware of it.

11
(1862) 1H & C 20
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Tort of Negligent Misstatement

A tort can be defined as a wrongful act or omission which gives rise to a civil action in a court of
law against the party that committed the wrongful act. The tort of negligent misstatement is
defined as an “inaccurate statement made honestly but carelessly usually in the form of advice
given by a party with special skill/knowledge to a party that doesn’t possess this skill or
knowledge12”. In today’s society we can observe that there are various forms of tort, some of
which have roots back in medieval times and have been recognized by courts since. In order to
prove that negligent misstatement occurred, we have to prove that the elements of negligence
were breached as most torts have common elements which include:

ELEMENT OF FAULT: There has to be proof presented showing that one party committed the
tortuous act either intentionally or negligently.

ELEMENT OF ACTUAL DAMAGE: The plaintiff would have the onus to prove that they
suffered actual damage/injury/loss as a result of the tortuous act by the tortfeasor.

ELEMENT OF OBTAINING REMEDY: As the law of Torts is concerned with compensating

the victim rather than punishing the wrongdoer, the rule applied by the Courts is to put the
plaintiff/victim into a position they enjoyed before the wrongful act took place. For example if a
person was wrongfully imprisoned, the courts would seek to put the victim back into the position
they previously enjoyed before the imprisonment took place possibly through monetary
compensation. For the Court to decide whether a tortuous act took place, it would have to take
into account additional factors that make the wrongdoer responsible for the outcome of the
tortuous act. Such factors include:

1. DUTY OF CARE: A person/party must initially owe a legal duty of care to the other
person/party in order to be held liable for negligence. “Duty of care can be defined as a
duty to take reasonable care/skill that a normal reasonable person would 13”. The onus is
therefore on the plaintiff to show that a duty of care was owed to him/her by the
defendant. The plaintiff will have to consider the three state test of proving that the duty
of care did exist between the plaintiff and defendant which considers.

12
Bill Willesee, Law management 252, Curtin Handbook 2010
13
Paul Latimer; Australian Law Handbook (2009) Chapter 4; Torts
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2. FORESEEABILITY: Was it reasonably foreseeable to the alleged wrongdoer that his/her

conduct/omission would be likely to cause harm? This is very much needed to be proved.
It is because we all know that one cannot be held liable for the acts which could not have
been foreseen by a common man.

3. PROXIMITY TEST: Was there a physical, factual or circumstantial link between the
parties involved should be very much checked. Following Sutherland Shire Council v
Heyman (1985) High Court of Australia it can now be said of proximity that:
A. It involves the notion of nearness or closeness, a nexus of relationship.
B. It embraces physical proximity (in sense of space and time) between the two parties
or their property.
C. It also concerns proximity in relationships such as employer and employee or of a
professional man and his client.
D. It also includes “causal proximity” in the sense of the closeness or directness between
the particular act or course of conduct and the loss and injury sustained.
E. It may reflect an assumption by one party of a responsibility to take care to avoid or
prevent injury, loss or damage to another, or where a party relies on such care.

4. VULNERABILITY: Is it possible that the plaintiff was vulnerable to harm as a result of

the defendant’s conduct/course of action? It is also very much to be proved by the
plaintiff to claim damages.

These pre-requisites need to be addressed in order to prove that the element of duty of care
was present when pursuing a case in negligence or negligent misstatement14.

CASE: Cann v. Wilson15: An action for negligent misstatement was recognized and damages
awarded. There, the defendants, who were valuers of property, overvalued certain property.

14
Bill Willesee, Law management 252 Curtin Handbook (2010), Chapter three
15
(1888) 39 Ch. D. 39.
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At that time, they knew that the property was being valued for the purpose of mortgage. On
the strength of the valuation, the plaintiff granted loan to the owner of certain property. When
the owner of the property defaulted in repayment, the plaintiff found that the true value of the
property was not sufficient to satisfy the mortgage debt. He wanted to recover the loss from
the defendants. The defendants were held liable because in these circumstances they incurred
a duty towards the plaintiff to use reasonable care in the preparation of the document16.

In 1932, liability for negligence was explained in Donoghue v. Stevenson17 by the House of
Lords.

FACTS:

The events of the case took place in Paisley, Scotland in 1928. While attending a store, MS
May Donoghue was given a bottle of ginger beer, which had purchased for her by a friend.
The bottle was later discovered to contain a decomposing snail. Since the bottle was not
made of clear glass, Donoghue had consumed most of its contents before she became aware
of the snail. She later fell ill and a physician diagnosed her with gastroenteritis. Donoghue
subsequently took legal action against Mr. David Stevenson, the manufacturer of the ginger
beer. She lodged a writ in the Court of Sessions, Scotland’s highest civil court, seeking £500
damages. Donoghue could not sue Stevenson for breach of contract, because a friend had
purchased the drink for her. Instead, her lawyers claimed that Stevenson had breached a duty
of care to his consumers and had caused injury through negligence – an area of civil law
which at the time was largely untested. Stevenson’s lawyers challenged Donoghue’s action,
on the basis that no precedents existed for such a claim. They referred to an earlier action by
Donoghue’s lawyer, Mullen v. AG Barr, where a dead mouse was found in a bottle of soft
drink; judges in this case dismissed it because of a lack of precedent. Donoghue’s initial
action failed, however she was granted leave to appeal to the House of Lords, which at the
time still had the judicial authority to hear appellate cases.

JUDGEMENT:

16
Ibid., at 43, per Chitty, J.
17
(1932) A.C. 562
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The leading judgment, delivered by Lord Atkin in 1932, established that Stevenson should
be responsible for the well-being of individuals who consume his products, given that they
could not be inspected. The case was returned to the original court; Stevenson died before the
case was finalised and Donoghue was awarded a reduced amount of damages from his estate.

OUTCOMES:

The outcomes of Donoghue v. Stevenson established several legal principles and precedents:
Negligence.

Firstly, the House of Lords ruling affirmed that negligence is a tort. A plaintiff can take civil
action against a respondent, if the respondent’s negligence causes the plaintiff injury or loss
of property. Previously the plaintiff had to demonstrate some contractual arrangement for
negligence to be proven, such as the sale of an item or an agreement to provide a service.
Since Donoghue had not purchased the drink, she could prove no contractual arrangement
with Stevenson – yet Lord Atkin’s judgment established that Stevenson was still responsible
for the integrity of his product.

Duty of care: Secondly, the case established that manufacturers have a duty of care to the
end consumers or users of their products. According to Lord Atkin’s ratio decendi, “a
manufacturer of products, which he sells… to reach the ultimate consumer in the form in
which they left him… owes a duty to the consumer to take reasonable care”. This precedent
has evolved and now forms the basis of laws that protect consumers from contaminated or
faulty goods. These protections began as common law but many have since been codified in
legislation, such as the Trade Practices Act (Commonwealth, 1974).

Neighbor principle:

Thirdly, the Donoghue v. Stevenson case produced Lord Atkin’s controversial ‘neighbor
principle’, which extended the tort of negligence beyond the tortfeasor and the immediate
party. It raised the question of exactly which people might be affected by negligent actions.
In Donoghue’s case she had not purchased the ginger beer but had received it as a gift; she
was a neighbor rather than a party to the contract. Atkin said of this principle: “You must
take reasonable care to avoid acts or omissions which you can reasonably foresee would be
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likely to injure your neighbor. Who, then, in law, is my neighbor? The answer seems to be
persons who are so closely and directly affected by my act that I ought to have them in
[mind] when I am [considering these] acts or omissions.” .
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INNOCENT MISREPRESENTATIONS

Innocent misrepresentation is one of the three recognized varieties of misrepresentations in

tort law. Essentially, it is a misrepresentation made by someone who had reasonable grounds
for believing that his false statement was true. So in the above example, if the seller didn't
know the stereo was actually old, he would only be liable for an innocent misrepresentation.

In the real world, however, it is often the case that because the other two varieties of
misrepresentation (negligent and fraudulent) are much more difficult to prove, often this is
the best course of action.

At common law, as for all forms of misrepresentation, innocent misrepresentation gave rise
to the right to rescind a contract. It was not possible to get damages, but so long as one was
not confronted by a bar to rescission, the misrepresented had a right to escape the contract.
When the Misrepresentation Act 1967 was passed, it was decided that this right to rescission
could be used in a way that was unfair on a misrepresentor. So section 2(2) gives the court
discretion about whether it will allow rescission of a contract, or substitute an appropriate
award of damages in lieu (instead).

Innocent misrepresentation occurs when the representor had reasonable grounds for
believing that his or her false statement was true. Prior to Hedley Byrne, all misrepresentations
that were not fraudulent were considered to be innocent. This type of representation primarily
allows for a remedy of rescission, the purpose of which is put the parties back into a position as
if the contract had never taken place. Section 2(2) Misrepresentation Act 1967, however, allows
for damages to be awarded in lieu of rescission if the court deems it equitable to do so. This is
judged on both the nature of the innocent misrepresentation and the losses suffered by the
claimant from it.
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CASE: Redgrave v. Hurd18

FACTS:

Mr Redgrave, an elderly solicitor, advertised for a partner to join the business and buy the
accompanying house. He said in an interview with Mr Hurd that the practice brought in £300 pa,
when it was only £200 pa. Mr Redgrave showed him summaries that came to a £200 pa average
income and said that the rest of the £300 figure was borne out by other papers in the office that
he could check (in fact they showed no business). Mr Hurd did not inspect the papers, until he
realised the truth just before completion of the agreement. He had signed the contract but he
refused to go through. Mr Redgrave sued for specific performance and Mr Hurd counterclaimed
for rescission based on fraudulent misrepresentation.

Fry J held that because Mr Hurd had not taken the opportunity to check through the papers, he
could not be taken to have relied on them. Mr Hurd appealed.

JUDGEMENT:

Sir George Jessel MR held that Mr. Hurd’s counterclaim for fraudulent misrepresentation failed
because there was no plea that Mr. Redgrave knew his statements were untrue. Therefore, there
was no entitlement to damages. Nevertheless, Fry J’s decision was reversed, and the contract was
rescinded on grounds of innocent misrepresentation. He held that relying on the representation
was enough and there was no duty to inspect the papers. For rescission, he noted the difference
of law (knowledge was necessary) and equity, where the approach was ‘A man is not to be
allowed to say… that when he made it he did not know it to be false; he ought to have found that
out before he made it’ and ‘no man ought to seek to take advantage of his own false statements’.
If a man is induced to enter a contract by a false representation it is not a sufficient answer to him
to say, ‘If you had used due diligence you would have found out that the statement was untrue.
You had the means afforded you of discovering its falsity, and did not choose to avail yourself of
them... If it is a material representation calculated to induce him to enter into the contract, it is an
inference of law that he was induced by the representation to enter into it’ and so it is for the
person alleging otherwise to show it.

18
(1881) 20 Ch D 1
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Misrepresentation in India

In India, the federal law defines misrepresentation under "Misconception of Fact". This is
dealt with under the Indian Penal Code in Section 90, which states19:

Consent given firstly under fear of injury, and secondly under a misconception of fact, is not
consent at all.

That is what is explained in the first part of Section 90. There are two grounds specified in
Section 90 which are analogous to coercion and mistake of fact which are the familiar
grounds that can vitiate a transaction under the jurisprudence of India and other countries.
The factors set out in first part of Section 90 are from the point of view of the victim; the
second part of Section 90 enacts the corresponding provision from the point of view of the
accused. It envisages that the accused has knowledge of - or reason to believe that - the
consent was given by the victim in consequence of fear of injury or misconception of fact.
Thus the second part lays emphasis on the knowledge or reasonable belief of the person who
obtains the tainted consent. The requirements of both parts should be cumulatively satisfied.
In other words, the Court has to determine whether the person giving the consent has done so
under fear or misconception of fact; the court should also be satisfied that the person doing
the act (i.e. the alleged offender) is conscious of the fact or should have reason to think that
but for the fear or misconception, the consent would not have been given. This is the scheme
of Section 90 which is couched in negative terminology.

19
Indian Penal Code 1860
 18

CONCLUSION AND SUGGESTIONS

It has been earlier known that the liability of a person arise in three different ways for the
false statement made by him. The three different ways were deceit, innocent
misrepresentation and negligent misstatement.

Even in deceit there are four categories which have further sub-divisions. This shows that
deceit is a very broad concept in itself. However in deceit there is a category which is mere
silence. A mere non-disclosure of the truth or mere silence as to certain facts does not
amount to fraud. I will suggest that this should also be considered fault because the wrong
doers know that they are doing wrong. I also think that fraud can be committed by making a
true statement when acted upon by the plaintiff proves detrimental to him. Therefore, these
laws also need an amendment.

Apart from that the rules laid down under negligent misstatement is brilliant. It is because
very detailed guidelines have been set for this category. After the coming of Misrepresentation
Act of 1967 in England the guidelines for innocent misrepresentation also got cleared.

We even have legal provision in India regarding the misstatements. It has been mentioned in
Section 90 of the Indian Penal Code. This shows the need behind making laws on misstatement.
It is because we observe most number of cases under this category only.
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BIBLIOGRAPHY

The researcher consulted following books while making the project:

1. Dr. R.K. Bangia – Law of Torts, 13th edition, Allahabad Law Agency.
2. Justice G.P. Singh – The Law of Torts, Lexis Nexis.
3. Dr. J.N. Pandey - Law of TORTS with Consumer Protection Act and
Motor Vehicles Act, 9th edition, Jain Book Agency.
4. Dr. A. Laxminath – The Law of Torts, Lexis Nexis.

The researcher consulted following websites while making the project:

1. www.lawteacher.net
2. Westlaw India
3. www.indiakanoon.org
4. www.e-lawresources.co.uk
5. www.bl.uk
6. www.loc.gov

The researcher went through following acts and statutes while making the project:

1. Indian Penal Code (Section 90).

2. Misrepresentation Act, 1967.