This Article FRAUD UNDER INDIAN CONTRACT ACT is written by Palak a 1st-year law student at Law College Rajasthan University
DEFINITION : FRAUD
In common law, a charge of fraud “is such a terrible thing to bring against a man that it cannot be maintained in any court unless it is shown that he had a wicked mind.”
A more elaborate definition of fraud has been given by Lord Herschell in DERRY V PEEK. According to him, fraud means a false statement “made knowingly, or without belief in its truth, or recklessly careless, whether it be true or false.”
Section 17 of the Indian Contract Act, 1872
Section 17 of the Indian contract act, 1872 describes fraud and lists the acts that amount to fraud, which are a false claim, active concealment, promise without the intention of carrying it out, any other deceptive act, or any act declared fraudulent. To constitute fraud, the contracting party, or any other individual with his connivance, or his agent, or to induce him to enter into the agreement, should have performed such acts. The parties have no duty to speak about facts likely to affect the consent of the other party to the contract, and mere silence does not amount to fraud unless the circumstance of the case shows that there is a duty to speak or silence equivalent to speech.
Fraud implies and involves any of the following acts committed by a contracting party or his connivance or his agent with the intention of deceiving or inciting another party or his agent to enter into the agreement.
- The suggestion, as a fact, of that which is not true by one who does not believe it to be true.
- The active concealment of a fact by one having knowledge or belief of the fact.
- A promise made without any intention of performing it.
- Any other act fitted to deceive.
- Any such act or omission as the law specially declares to be fraudulent.
Mere silence as to facts likely to affect the willingness of a person to enter into a contract is not fraud, unless the circumstance of the case is such that, regard being had to them, it is the duty of the person keeping silence to speak, or unless his silence, in itself is, equivalent to speech.
Illustration– A sells by auction to B a horse, which A knows to be unsound, A says nothing to B about the horse’s unsoundness. This is not fraud in A.
The essential features of fraud include –
- Fraud must be committed by a party to the contract directly or indirectly or by his agent. However, where the contract was a result of a 3rd person being instrumental for his own ulterior motives, the contract cannot be avoided;
- Intention to deceive or inducing the other party to contract is a must.
- In a suit against fraud, to claim relief, the plaintiff has to show that the defendant made fraudulent representations and the plaintiff was in fact deceived and acted to his prejudice. In lay terms, a plaintiff cannot claim any right to redress in cases of both deceit without damage and damage without deceit.
In R.C. THAKUR V. THE BOMBAY HOUSING BOARD (now the Gujarat Housing Board) A.I.R 1973 GUJ. 34 the high court held: “even if the motive of the person indulging in deceit is laudable, he cannot escape from the consequences of his action.”
What Are Active Concealment and Passive Concealment
Active concealment and passive concealment of facts differ from each other. Passive concealment means mere silence regarding the material facts, whereas active concealment is to hide a material fact which eventually leads to fraud.
Example of Active Concealment
A person, after being inquired about, sold his land to the state which was already acquired under the Land Acquisition Act, which he did not disclose earlier. Since the seller of the property kept the buyer unaware of the pending litigation of the property, he was entitled to refund the principal amount with 6% interest on it to the buyer. The act of the seller’s surrender of the land was held nullified. P.L. Raju vs Dr. Nandan Singh (2005)
Example of Passive Concealment
Mr A, a vegetable vendor, kept some vegetables of inferior quality in his shop to sell. Mr B bought some vegetables. Even though Mr B had a chance to question the quality of the vegetables, he did not. In this case, Mr B cannot hold Mr A liable for fraud as Mr A was under no obligation to reveal the quality of the vegetables.
Hence, passive concealment refers to the mere silence of material facts. Although knowing that such silence could cause loss to the other party, it does not amount to fraud.
The Effect of Fraud on a Contract
According to Section 19, the legal effect of fraud in a contract whose consent was gained through fraudulent means is that it is voidable with the permission of the other party. The person who was misled has two options. He can either cancel the contract to the extent that it is not being performed, or he can confirm the contract and demand that he be placed in the same situation as he would have been in if the representations were true.
He is responsible for paying back the benefit he obtained under section 64 upon revocation, and may be entitled to damages. When stating the effects of fraud in a contract, the amount to be paid back includes all actual loss that has been incurred directly from the transaction covered by the fraud, including consequential loss, and not just loss that was reasonably anticipated.
Mere Silence is Not Fraud under Contract Law
Under the Indian Contract Act of 1872, mere silence is not considered Fraud. Section 17 of the Act defines “fraud” and states that a contract induced by Fraud is voidable at the party’s option who has been defrauded. However, for a contract to be declared voidable due to Fraud, it must be proven that a false representation was made to deceive.
Generally, a failure to disclose information or maintain silence is not deemed Fraud under the Indian Contract Act. Mere silence alone does not constitute fraudulent behaviour unless the case circumstances require the person to speak and disclose relevant facts or if the person’s silence can be considered equivalent to making a statement. In such situations, where there is a duty to speak or the silence itself is deceptive, the Act of keeping silent can be considered Fraud under the Indian Contract Act.
Why is Mere Silence Not Considered Fraud?
Under the Indian Contract Act of 1872, silence or failure to disclose facts can be considered Fraud if the circumstances require the person to speak or if their silence is equivalent to expressing false information. The Act allows contracts to be voidable in the absence of free consent. Still, there are exceptions where silence or false representation may not be considered fraudulent if the party could have discovered the facts through reasonable care.
EXCEPTIONS– The silence amounts to fraud in the following cases, namely:
The silence amounts to fraud in the following cases, namely:
DUTY TO SPEAK
Mere silence amounts to fraud when the person keeping silent, is under a duty to speak. The duty to speak arises, where one party reposes trust and confidence in the other.
Circumstances where it is the duty of the person keeping silence to speak are: –
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.
Another instance where a duty to disclose facts arises is where the parties to the contract repose “trust and confidence” in each other giving rise to a fiduciary relationship.
Example: 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.
Speaking half truth
Subject to statutory exceptions under Explanation to Section 17 a person keeps silent 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 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.
In some cases, disclosure is required by statute. In such a case also there arises a duty to speak.
For instance, under the Transfer of Property Act 1882, under Section 55, the seller of immovable property is bound to disclose to the buyer all latent material defects in the property. Not doing so will amount to fraud.
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.
WHERE SILENCE IS EQUIVALENT TO SPEECH
Sometimes, silence is equivalent to speech. In such cases, the silence of a person amounts to fraud e.g., where a person keeps silent, knowing that his silence is going to be deceptive, he is guilty of fraud.
Example: 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.
What Happens to the Part Falsely Claiming Fraud?
Even if a false statement was made, the party falsely claiming fraud could not be said to have been defrauded. This is because he knew the facts or had the means to know them. Also, a contract cannot be cancelled based on a minor and insignificant misstatement or non-disclosure of any facts. In a case law, namely Janakiamma v Raveendra Menon, where the petitioner knew what was in her father’s Will, the partition of property following the deaths of the father and mother was not set aside on the grounds of fraud for neglecting to reveal the contents of the Will, and no new partition was mandated.
The evasion or hiding of a fact by one who has knowledge or belief of the fact to be true, or a promise made with no intention of performing it, is considered fraud under the Indian Contract Act. As a result, simply being silent about certain material facts affecting an individual’s desire to enter into a contract would not be regarded as fraud. However, if their silence can be considered speech, or if the individual must inform the other party of the facts and events, their silence would constitute fraud.
Hence, mere silence of certain material facts affecting the wish of an individual to enter into the contract would not amount to fraud. But if their silence can be treated as speech or the individual has a duty to inform the other party of the facts, silence would amount to fraud. Mere silence can result in fraud because of non-disclosure of relevant facts by one party causing damages to the other party.
A desperate financial need may be the cause of fraud prevalent all across the globe. Punishment for fraud is quite minimal and should be replaced with a harsh penalty to instill a moral conscience in the citizens to not be swayed by the rewards of fraud. The public must be aware of prevalent scams and must verify whether the information provided by the party is credible or not. Elimination of fraud is not an instantaneous event, but society as a whole has to pay the price.
- Avtar Singh, Contract and Specific Relief, 12th Ed (2020)
- Pollock and Mulla, The Indian Contract Act,1872, 15th ed (2017)
- BOOK BY S.K. KAPOOR- CONTRACT 1