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What is Fraud? - Indian Contract Act

Fraud
Introduction
The element of fraud in a contract vitiates the contract and such a contract by fraud is voidable
at the option of the aggrieved party.
Very often facts are misrepresented, that is, they are declared in a distorted manner. When facts
are intentionally misrepresented, it is known as fraud , which is dealt with in Section 17 of the
ICA. However, unintentional or innocent misrepresentation is not fraud. They are simply
misrepresentation falling under Section 18 of the Act. Thus, where a false statement is made
intentionally, with the knowledge that it is false, with a view to deceive the other party and
thereby inducing him into entering the contract – it is known as fraud .
But when the person making the false statement believes the statement to be true and does not
intend to deceive the other party to enter into the contract – it is known as misrepresentation.
Thus it can be said that fraud is a willful misrepresentation or a fraudulent misrepresentation
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and includes all the acts committed by a person to deceive the other .
Definition
Section 17 of the Act defines fraud as –
“Fraud” means and includes any of the following acts committed by a party to a contract, or
with his connivance, or by his agents, with intent to deceive another party thereto his agent, or
to induce him to enter into the contract.
Section 17 (1) – the suggestion as to a fact of that which is not by one who does not believe it
to be true – is known as SUGGESTIO FALSI or suggestion of falsehood.
Section 17 (2) – the active concealment of a fact by one having the knowledge or belief of the
fact – is known as SUPPRESIO VERI or suppression of a fact.
Section 17 (3) – a promise made without any intention of performing it. It means a promise
made falsely with the intention of inducing the other party to make a reciprocal promise and
thereby enter into a contract.
Section 17 (4) – any other Act fitted or designed to deceive.
Section 17 (5) – any such act or omission as the law specially declares to be fraudulent
Explanation to Section 17
This Explanation states a very important proposition of law. According to Explanation to Section
17 – the mere silence as to a fact likely to affect the willingness of a person to enter into a
contract is not fraud. However, such silence is to be held as fraud , if the circumstances of the
case that –
It is the duty of the person keeping silence – to speak
That his silence in itself is equivalent to speech.
Essentials of Fraud
Analyzing the definition of fraud under Section 17 , we get the following essential elements of
fraud –
Party to the contract –
The Act of fraud must be done –
By the party to the contract himself
With his connivance
Or by his agent
There must be a false representation or assertion – Section 17 (1)
To constitute fraud there must be conjugation of 2 things –
A representation or assertion of a fact which is not true and
The person making such representation or assertion of fact does not believe it to be true.
This is what is meant by suggestio falsi or suggestion of falsehood coupled with the knowledge
of its falsity.
There must be active concealment of fact – Section 17 (3)
By active concealment of certain facts there is an effort to see that the other party is not able to
know or discover the truth. He is made to believe something is true whereas that is false. This is
known as SUPPRESIO VERI or suppression of fact purposefully.
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The implication of such active concealment is more grave where it is the duty of the person to
disclose – fiduciary relationship.
Illustration -
B having discovered a vein of iron ore in the estate of A adopts means to conceal and is
successful to conceal the existence of the ore from A. through A’s ignorance he buys that estate
at an under value.
It is a voidable contract under Section 2(1) of the Act. So A may cancel the contract because it is
a fraud committed against him by B. the fraud is a fraud of concealment of fact.
A promise made without the intention of performing it – Section 17(3)
When a person makes a promise then it is deemed to be an undertaking by him that he will
perform the promise. According to Section 17(3) if there is no such intention to perform the
contract, at the time when the contract was made, it amounts to fraud.
Any other Act fitted or designed to deceive – Section 17(4)
This provision is general in nature and is intended to include other means of trick and unfair
means intended to deceive any one other than by means of suggestio falsi, suppresio veri or a
promise made without the intention to perform it. Under this Section, any such acts will amount
to fraud.
Any such acts of omission as the law specially declares to be fraudulent – Section 17(5)
According to Section 17(5) fraud includes any such acts of omission which specially declares it
to be fraudulent. For instance under the TP Act 1882, under Section 55 , the seller of immovable
property is bound to disclose to the buyer all material latent defects in the property. Not doing so
will amount to fraud.
Representation must relate to a fact-
The representation, assertion, intention or suggestion under Section 17(1) must relate to a
material fact.
Any superfluous opinion or exaggerated statement or flourishing description are not regarded as
representation of facts.
Illustration –
A while selling rings to B says – ” the rings are as good as that of Y.” this is a mere statement of
opinion which cannot be regarded as amounting to fraud.
Wrongful intention –
To constitute a fraud it is necessary that a person should intentionally make a false statement to
deceive another party and thereby induce him to enter into a contract. If the intention to deceive
the party is absent, there is no fraud – vide case of DERRY vs. PEEK.
The acts must have in fact, deceived the party –
A mere attempt to deceive the party is not fraud under the ICA unless the party is actually
deceived. Fraudulent misrepresentation must have been made with an intention to deceive.
According to the Explanation appended to Section 29 of the Act, deceit which does not deceive
does not amount to fraud and cannot hence make the contract voidable.
The other party must suffer loss –
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To constitute a fraud, under the ICA, it is necessary that the other party must have suffered some
material loss as a consequence of the deceit. Hence, there is no fraud without damage.
Mere silence / non-disclosure vis-a-vis Fraud
According to Section 11, in order to constitute fraud there must be a false representation or
assertion of a fact – vide Section 17(1). In other words, there could be suggestio falsi coupled
with the knowledge of its falsity.
Active concealment of a fact has also been considered as amounting to fraud because in that
case there is a positive effort to conceal the truth from the other party. He is made to believe as
true that fact which false. This is what is known as suppresio veri – vide Section 17(2).
At the same time it may be mentioned here that Explanation to Section 17 lays down that mere
silence as to facts does not amount to fraud. It states that – mere silence as to facts does not
amount o fraud unless it is the duty of the person keeping silence to speak or when his silence is
equivalent to speech.
Thus a person is required by law to refrain from intentional or active concealments as to facts.
But it does not mean that he is to disclose all material defects of the contract to the other party.
A contracting party is under no compulsion or obligation to point out the defects as to the
subject matter of the contract to the other party.
Illustration -
If a person is to sell his goods he is under no obligation to disclose the defects in his goods, but
if he makes an intentional false statement as to the quality of his goods, it will amount to fraud
as under Section 17(1). If he indulges in any Act amounting to active concealment of facts it will
constitute to fraud under Section 17 (2). But if he merely keeps silence it will not constitute fraud
subject to certain exceptions.
In case of sale of goods, the rule which is applicable is caveat emptor – or the doctrine of let the
buyer beware. It means that it is the duty of the buyer to be careful while purchasing the goods
as there is no implied condition or warranty as to quality or fitness of goods.
Illustration –
A sells by auction to B, a horse which A knows is of unsound mind. A says nothing of the
unsoundness of the horse. A has not committed fraud as mere silence does not amount to
fraud.
Case Law – SHRI KISHAN vs. KURUKSHETRA UNIVERSITY
Facts -
S, a candidate for the LLB Part I Examination who was short of attendance did not mention that
fact himself in the form. Neither the head of the law department nor the university authorities
made proper scrutiny to discover the truth.
Held -
The Supreme Court held that there was no fraud by the candidate as he merely kept silent as to
his attendance which the authorities could have discovered had proper scrutiny been made. The
university had no power to cancel the candidature of the candidate on that ground.
Exception to the rule – mere silence / non-disclosure amount to fraud
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Explanation to Section 17 mentions that mere silence or non-disclosure does not amount to
fraud, other than certain statutory exceptions –
When there is a duty to speak keeping silence is fraud.
When silence itself is equivalent to speech.
Duty to speak -
Uberrimae Fedei
There are certain contracts which are contracts of uberrimae fedei meaning contracts of
utmost good faith. In such a type of contract it is supposed that the party in whom good faith is
reposed, would make full disclosure of it and not keep silent.
One instance of contract of uberrimae fedei is contract of insurance . In such a contract, there
may be certain facts which are in full knowledge of the insured or policy holder. He must make
full disclosure of such facts to the insurer or insurance company.
CASE LAW – V. SRINIVASA PILLAI vs. LIC of INDIA.
It was held in this case by the Supreme Court that contract of insurance being one of uberrimae
fedei, it is normal to expect in such a contract utmost good faith on the part of the insured. The
insured is expected to answer certain questions by the insurer and it is his responsibility to give
true and faithful answers. If the insured has knowledge of certain facts which others cannot
ordinarily have, then he should not indulge himself in suggestio falsi or suppressio veri.
When in the case of contract of insurance, where there exists a duty to disclose , then non
disclosure of facts that are non-material to and having no bearing on the risk undertaken by
the insured, it does not render the contract voidable.
Fiduciary relationship
Another instance where a duty to disclose facts arises is where the parties to the contract
repose “trust and confidence” in the each other giving rise to a fiduciary relationship.
Illustration –
A sells a horse to B, his daughter by auction, who has just come of age. Here the relationship
between the parties would make it the duty of A to disclose that the horse is unsound. If he does
not disclose so, it would amount to fraud.
iii. Speaking half truth
Subject to statutory exceptions under Explanation to Section 17 a person keeping silence but if
he decides to speak, a duty arises to disclose the whole truth. Withholding a part of the
information amounts to fraud.
Thus, speaking half truths may also amount to willful misrepresentation as regards to the facts
which have not been disclosed. When there is a duty to disclose all facts, then non disclosure or
half-disclosure of facts amounts to fraud.
iv. Statutory disclosure
In some cases the disclosure is required by a statute. In such a case also there arises a duty to
speak.
For instance, under the TP Act 1882, under Section 55 , the seller of immovable property is
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bound to disclose to the buyer all material latent defects in the property. Not doing so will
amount to fraud.
Section 150 of the ICA envisages a duty of the bailor to disclose faults in goods bailed failing
which he may be held liable for damages.
v. Custom of trade
If the usage or custom of trade requires disclosure of certain things or known defects then non
disclosure would amount to fraud. For example, tobacco/liquor is injurious to health.
2. When silence is equivalent to speech -
A person who keeps silence knowing fully well his silence is going to be deceptive – is no less
guilty of fraud.
Sometimes, keeping silence as to a certain fact may create an impression as to the existence of
such facts. In such a case silence amounts to fraud.
Illustration –
A says to B ” If you do not deny it I shall accrue that the horse is sound .” B says nothing. Here B’s
silence is equal to speech that the horse is sound. Later if the horse turns out to be unsound, B
will be guilty of fraud.
Consequences of fraud
According to Section 19 where a consent to an agreement is caused by fraud , the agreement to
a contract is voidable at the option of the party whose consent was so caused by fraud. Until
such time it is avoided, the contract is valid.
The party defrauded has the following specific remedies –
· To rescind the contract
· To affirm it
· Rescind and claim for damages
· Enforce principle of restitution
· Sue for specific performance
· If he chooses to rescind the contract he must do so within reasonable time. When the contract
is rescinded it becomes void and unenforceable.
· However, if the party chooses, he may affirm it , then the question of rescinding the contract
does not arise and the principle of estoppel will be revoked against him.
3. Fraud is a tort. Thus, the aggrieved party can in a case of fraud , apart from rescinding the
contract, can file a suit to claim damages.
4. He may enforce the principle of restitution against the other party – under Section 64 of ICA.
5. He may insist for a decree of specific performance of the contract minus the element of
fraud.
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Tanay Saraf
Tanay Co-founder of SB Legal Partners Follow