What Is Fraud as Per Contract Act?
Intentional misrepresentation of facts with the aim to deceive and trick someone is called “fraud.”
Under section 17 of the Indian Contract Act, 1872, fraud is defined as any act committed by a party to a contract, or with his connivance (willingness to allow), or by his agents, with the intention to deceive or trick the other party, his agent, or to induce him to enter into the contract.
Different parameters for a situation to be considered fraud are:
- If someone delivers a suggestion (that he himself does not believe to be true) as a fact, it is considered fraud. For example, X knows that Mr Z is a cheater. Still, X suggests to Y that Mr Z is an honest man and you can do business with him. Here, X has committed fraud.
- 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.
Explanation: Mere silence that might only affect the other person’s willingness to enter into the contract does not amount to fraud; unless a circumstance arises where there is a duty to speak on the person who keeps silent or his silence is considered equivalent to speech.
- What Is Fraud as Per Contract Act?
- Essentials of Fraud
- What Are Active Concealment and Passive Concealment
- Exceptions to “Mere Silence Is No Fraud” or When Silence Is Fraud
- Promise Made Without the Intention of Performing
- Any Act or Omission Specially Declared to Be Fraudulent
- Difference Between Fraud and Misrepresentation
Essentials of Fraud
Some of the ingredients that are necessary for a case to be fraud are:
- False representation should be done intentionally, or
- Without belief in its truth, or
- Made carelessly without knowing whether it is true or false.
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.
Exceptions to “Mere Silence Is No Fraud” or When Silence Is Fraud
“Mere silence is no fraud” cannot go beyond a certain limit, and it comes with some exceptions to it.
These are the situations when silence is a fraud:
Here is more about these five situations when silence is fraud.
1. Duty to Speak (contracts Uberrima fides)
If it is the duty of the person who is keeping silence to speak, maintaining silence in such a case amounts to fraud.
The duty to speak is an obligation in fiduciary relationships, where one party reposes trust and confidence in the other.
For example, Mr A was suffering from severe stomach pain due to the stone in his gall bladder, which the doctor detected, but he chose not to tell the patient about it. After some years, the pain gets intense, and then the patient gets to know about his condition from some other doctor. So, in this case, the previous doctor would be held liable for committing fraud as it was his duty to tell the patient about his ailment.
Uberrima fides means utmost good faith.
Another example, Contract of insurance.
P.C Chacko and Anr vs Chairman LIC of India (2007): In this case, the insured had undergone a thyroid operation. He had a major operation four years before the date he took the insurance policy. He did not disclose this fact while obtaining the insurance policy. He took the policy on 6th July 1987, and within six months, on 21st February 1987, he died. The court held that the insured did not disclose all material facts of the contract, so it amounts to fraud.
2. Where Silence Is Deceptive
When the person knows that his silence will be equivalent to speech but still chooses to stay silent, he is guilty of fraud. This is because silence is sometimes equivalent to speech.
For example, the buyer knows the value of the property, which is of a higher amount than quoted by the seller but chooses to stay silent with an intention to cheat him. The buyer would be held liable for fraud, and the seller can declare the sale of property as void.
3. Change of Circumstances
Sometimes in a few cases, the first statement made or first representation made stands true but later, due to some circumstances, they change and amount to false representation. In that case, the person who made the first representation is obligated to inform the other party about the same.
For example, a prospectus of the company for job recruitment mentioned all the directors of the company. Later, changes were made, but the company did not modify its prospectus. As a decision, it should be held that changes in the prospectus and procedure of the job recruitment should be made simultaneously.
A person can choose not to disclose a fact, but if he starts speaking, he has to tell the whole truth.
If a person is in a position not to reveal anything (mere silence not amounting to fraud) but still chooses to reveal a bit of the information, then that person is obligated, or say legally bound to reveal the entire truth. Otherwise, in the case of revelation of a half-truth, he would be held liable for committing fraud.
For example, a patient had diabetes and was also under treatment for some heavy-dose medicines. He did not tell the doctor specifically about diabetes, and he just said he is taking other medicines too. So, in this case, a patient not revealing the entire truth would amount to fraud.
5. Marital Facts
Non-disclosure of material facts relating to parties to the marriage has been held to constitute fraud.
Promise Made Without the Intention of Performing
To make the other person bound to a promise with no intention of performing it from one’s side or with the intention just to prevent the other person from dealing or coming into contract with the other party is a promise made without the intention of performing it. This is the third type of fraud included in the definition of section 17 of the Indian Contract Act.
For example, buying goods without the intention of paying the amount is a sort of this fraud. Clough vs London and North Western Railway Co (1871)
Any Act or Omission Specially Declared to Be Fraudulent
The fifth and last category of frauds defined under section 17 includes all such acts that under any other law are considered fraudulent. This is done to cover all sorts of intentional trickery and leave none.
Note: The fourth kind of fraud identified by section 17 of the Indian Contract Act is that any act done with the intention to deceive comes under the expression “any other act fitted to deceive.”
Difference Between Fraud and Misrepresentation
These are the major differences between fraud and misrepresentation as per the Indian Contract Act:
- Fraud is an act that is done intentionally, whereas misrepresentation is not.
- In fraud, the aim is to deceive someone, which is not the case in misrepresentation.
- In fraud, the party making the statement knows that the statement is false. In misrepresentation, the party themselves are ignorant about the fact of the statement.
- The aggrieved or the victim party can claim damages in fraud. Whereas, in misrepresentation, the aggrieved party has the option to continue with the already done act (voidable).
- Fraud is defined under section 17 of the Contract Act, whereas misrepresentation is defined under section 18 of the Contract Act.
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