Fraud under Indian Contract Act

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Section 17 of the Indian Contract Act, 1872 defines Fraud. It outlines the specific acts that qualify as fraudulent, namely false claims, active concealment, empty promises, deceptive acts or acts explicitly declared fraudulent. 

These acts must be performed by the contracting party or in collusion with them or their agent to induce the other party to agree. The parties involved are not obligated to disclose facts that could affect the consent of the other party and silence alone does not constitute Fraud unless the circumstances require disclosure or the silence is considered equivalent to speech.

Definition of Fraud

Fraud encompasses various actions by a contracting party or their accomplice or agent to deceive or entice another party or their agent into entering an agreement.

These actions include:

  • Presenting as true something that is known not to be true.
  • Actively hiding a fact when one has knowledge or belief of its existence.
  • Making a promise without any intention of fulfilling it.
  • Engaging in any other deceptive act.
  • Committing any act or omission that the law specifically declares as fraudulent.

However, mere silence regarding facts that could impact a person’s willingness to enter into a contract is not considered Fraud under Indian Contract Act, unless the circumstances of the case impose a duty to disclose those facts or if the silence itself is equivalent to speech. To illustrate, if A sells a horse to B through an auction, knowing the horse is unsound but not mentioning it to B, A’s silence, in this case, would not be considered Fraud.

Ingredients of Section 17 of the Indian Contract Act

Section 17(1) of the law defines the elements of Fraud in the Contract Law as follows:

  • There must be a suggestion made regarding a fact.
  • The fact suggested must be untrue.
  • The suggestion must come from someone who does not believe it to be true.
  • The suggestion must be made to deceive or induce the other party to enter the contract.

What is Fraud under Indian Contract Act?

Based on the definition of Fraud under section 17, the circumstances that constitute Fraud are:

Asserting Facts Without Belief in Their Truth

In the case of Derry vs. Peek, a notable English case, a company made a false representation but genuinely believed in the truth of the representation they conveyed. The court observed that Fraud is proven when it is demonstrated that a false representation has been made knowingly, without belief in its truth or recklessly careless about its truthfulness. 

Therefore, intentional misrepresentation is the core of Fraud under the Indian Contract Act and is addressed in the first three clauses of Section 17. The elements involved in this aspect of Fraud are: 

(a) the presence of a suggestion as to a fact, 

(b) the fact suggested being untrue, 

(c) the suggestion being made by a person who does not believe it to be true and

 (d) the intention behind the suggestion being to deceive or induce the other party to enter into the relevant contract. 

However, if the plaintiff could have discovered the truth through ordinary diligence, Fraud is not established.

Reckless Statements

To establish Fraud under Indian Contract Act, it is sufficient to prove the absence of actual and honest belief, whether the representation was made recklessly or deliberately. The indifference or recklessness of the person making the representation towards its truth or falsity indicates a lack of belief. 

Statements made without belief in their truth would encompass recklessly made statements. Misrepresentations regarding titles made by vendors recklessly or with gross negligence cannot escape the charge of fraudulent misrepresentation.

Ambiguous Statements

When the person making a statement presents it ambiguously, the recipient must demonstrate that they understood it in a false sense. The person making the statement would be guilty of Fraud under Indian Contract Act if they intended the statement to be understood in that false sense, regardless of whether they honestly believed it true. 

However, if the person relying on the statement interprets it differently, the person making it would not be guilty of Fraud based solely on that interpretation. Once it is established that the representation was fraudulent under this clause, the exception in Section 19 is not applicable. Whether the person alleging Fraud could have discovered the truth through ordinary diligence becomes irrelevant.

Active Concealment

Active concealment occurs when one party intentionally hides material information related to the contract, despite having a duty to disclose such information. In simpler terms, it refers to the failure to disclose relevant information. 

It is important to note that passive concealment, in this context, refers to silence. The section clarifies that while mere silence is not considered Fraud under Indian Contract Act, it can constitute Fraud in situations where the party must speak or when their silence is equivalent to speech.

What Does Active and Passive Concealment Mean?

There are two distinct types of concealment: active concealment and passive concealment. Each type differs from the other in nature and consequences.

Active Concealment

Active concealment involves intentionally hiding or suppressing material information relevant to a contract or agreement. It requires an affirmative and deliberate act to prevent the other party from discovering the truth. Active concealment is considered an active form of deception and can lead to Fraud under Contract Law. By concealing important facts, a party aims to mislead or deceive the other party into entering the contract.

Passive Concealment

On the other hand, passive concealment is characterised by remaining silent or omitting to disclose relevant information. It occurs when a party fails to disclose material facts that they must reveal. Unlike active concealment, passive concealment does not involve an affirmative act of hiding or suppressing information. Instead, it fails to speak up and provide the necessary information. Mere silence or omission to disclose does not typically amount to Fraud unless there is a specific duty to speak or the silence itself is equivalent to speech.

The Effect of Fraud on a Contract

Section 19 outlines the legal consequences of Fraud in a contract where consent was obtained through Fraud. In such cases, the contract is considered voidable, meaning that the affected party can either cancel the contract to the extent that it has not been performed or to affirm the contract and seek remedies.

The party who was deceived has two options:

Cancelling the Contract

The deceived party can cancel the contract, rendering it void from the beginning. By doing so, they are released from their obligations under the contract.

Affirming the Contract and Seeking Remedies

Alternatively, the deceived party can affirm the contract and seek remedies. In this case, they demand to be placed in the same position they would have been in if the fraudulent representations had been true. This may involve seeking compensation for any losses suffered as a result of the Fraud.

Upon revocation or cancellation of the contract, the deceived party is obligated to restore any benefits they obtained under the contract. Section 64 stipulates that they are responsible for returning any advantages, such as monetary gains or goods received, that were derived from the fraudulent contract.

Additionally, the deceived party may be entitled to damages. This includes the actual loss directly resulting from the fraudulent transaction and consequential losses. The damages awarded are not limited to the loss that could have been reasonably anticipated but encompass all losses incurred as a direct consequence of the Fraud.

Section 19 of The Indian Contract Act

When a party enters into a contract that involves Fraud, according to Section 19 of Contract Law, the contract is considered voidable at the discretion of the party whose consent was obtained through fraudulent means. The party who was deceived or whose consent was influenced by Fraud can either affirm the contract or void it.

If the deceived party chooses to affirm the contract, they insist it is performed. By doing so, they seek to be placed in the same position they would have been in if the fraudulent representations or false statements made during the formation of the contract were true. Essentially, the deceived party wants the contract executed as if the Fraud had not occurred.

It is important to note that the decision to affirm the contract is at the discretion of the deceived party. They have the right to choose whether to treat the contract as valid or to void it based on the fraudulent actions of the other party.

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 to “Mere Silence Is Not Fraud” or When Silence Is Fraud

While it is generally stated that mere silence is not considered Fraud, there are certain exceptions and instances where silence can be deemed fraudulent under the Indian Contract Act of 1872. These exceptions include the following:

The obligation to speak

If there is a legal or moral duty on the person who remains silent to disclose certain information, their silence can be considered fraudulent. In such cases, the person must speak and failing to do so amounts to Fraud under Indian Contract Act.

Where Silence Can Be Deceiving

If the circumstances of the case are such that the person’s silence will be interpreted as making a statement or conveying information and they deliberately choose to remain silent, it can be deemed as Fraud under Indian Contract Act. The person knows that their silence will be misleading and deceiving the other party.

Half-truths

If a person chooses to speak but provides incomplete or partial information, withholding material facts can be considered fraudulent. Once they start speaking, they are obligated to disclose the entire truth and failure to do so amounts to Fraud under Indian Contract Act.

Marital Facts

In the context of marriage, the non-disclosure of material facts related to the parties involved has been held to constitute Fraud. This means that failing to disclose important information about one’s marital status or other relevant facts can be considered Fraud.

In these exceptional cases, silence can be deemed fraudulent because the person’s silence, under specific circumstances, misleads and deceives the other party, causing them harm or loss.

Difference Between Misrepresentation and Fraud

MisrepresentationFraud
DefinitionFalse statement of fact or law made innocently or without the intent to deceive.False representation made knowingly, without belief in its truth, or with reckless disregard for its truthfulness.
IntentNo intention to deceive or defraud.Intention to deceive or induce another party to enter into a contract.
NatureMay be made negligently or innocently.Deliberate act with the intention to mislead or defraud.
LiabilityCan give rise to remedies such as rescission, damages, or restitution.Can render the contract voidable at the option of the party defrauded, and additional remedies such as restitution or damages may be available.
Knowledge of falsehoodThe person making the statement may genuinely believe it to be true.The person making the false representation knows it to be false or lacks belief in its truth.
Effect on contractMay affect the validity of the contract or the terms agreed upon.Can render the entire contract voidable or allow the defrauded party to seek remedies or cancellation of the contract.
Mental stateMay involve a mistake or innocent misstatement.Involves a deliberate act with the intent to deceive and gain an advantage.

Conclusion

Fraud under the Indian Contract Act refers to acts involving intentional deception, false representations or concealment of facts to deceive or induce another party into a contract.

It renders the contract voidable at the option of the party defrauded, allowing them to either cancel the contract or demand performance while seeking restitution for any losses suffered.

Exceptions to the general rule of “mere silence are not fraud” exist when there is a duty to speak or the silence is equivalent to a false representation.


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