When consent to an agreement is caused by coercion, fraud or misrepresentation, the agreement is a contract voidable at the option of the party whose consent was so caused.
A party to a contract, whose consent was caused by fraud or misrepresentation, may, if he thinks fit, insist that the contract shall be performed, and that he shall be put in the position in which he would have been if the representations made had been true.
Exception. — If such consent was caused by misrepresentation or by silence, fraudulent within the meaning of section 17, the contract, nevertheless, is not voidable, if the party whose consent was so caused had the means of discovering the truth with ordinary diligence.
Explanation. — A fraud or misrepresentation which did not cause the consent to a contract of the party on whom such fraud was practised, or to whom such misrepresentation was made, does not render a contract voidable.
Illustrations
(a) A, intending to deceive B, falsely represents that five hundred maunds of indigo are made annually at A's factory, and thereby induces B to buy the factory. The contract is voidable at the option of B.
(b) A, by a misrepresentation, leads B erroneously to believe that, five hundred maunds of indigo are made annually at A's factory. B examines the accounts of the factory, which show that only four hundred maunds of indigo have been made. After this B buys the factory. The contract is not voidable on account of A's misrepresentation.
(c) A, fraudulently informs B that A's estate is free from incumbrance. B thereupon buys the estate. The estate is subject to a mortgage. B may either avoid the contract, or may insist on its being carried out and the mortgage-debt redeemed.
Legal Commentary & Landmark Judgments: Section 19
Section 19 of the Indian Contract Act, 1872 establishes the voidability of contracts induced by coercion, fraud, or misrepresentation, conferring the right of rescission upon the aggrieved party.
Furthermore, the explanation requires proof that the fraud or misrepresentation actually operated on the victim's mind to induce consent.
The ordinary diligence exception in Section 19 does NOT apply to cases of active fraud under Section 17(1) or (2). A perpetrator of active fraud cannot defend themselves by claiming the victim was gullible or could have discovered the truth. However, for innocent misrepresentation under Section 18, failure to exercise ordinary diligence extinguishes the right to avoid the contract.