Free Consent - Fraud

Fraud is defined under section 17 of the Indian Contract Act,1872 as,

“Fraud means and includes any of the following acts committed by a party to a contract, or with his connivance, or by his agent, with intent to deceive another party thereto or his agent, or to induce him to enter into the contract:

(1) the suggestion, as a fact, of that which is not true, by one who does not believe it to be true;

(2) the active concealment of a fact by one having knowledge or belief of the fact;

(3) a promise made without any intention of performing it;

(4) any other act fitted to deceive;

(5) any such act or omission as the law specially declares to be fraudulent.

Explanation.—Mere silence as to facts likely to affect the willingness of a person to enter into a contract is not fraud, unless the circumstances of the case are such that, regard being had to them, it is the duty of the person keeping silence to speak, or unless his silence is, in itself, equivalent to speech.”

The above definition specifies the acts that amount to be fraud. The term ‘means and includes’ suggests the intention of the legislature to make this an exhaustive definition. For the purposes of this act, a person commits fraud only when he commits any of the acts mentioned in the definition.

1.     False assertion without belief in truth

This first act refers to intentional misrepresentation as an essential ingredient of fraud as also mentioned by the House of Lords in the case of Derry v. Peek, [1889] UKHL 1. In this case, a company presented on its prospectus that it had been authorized to run trams on steam by a special act of the Parliament. The plaintiff purchased some shares in the company. The authority to use steam was to be given only with the consent of a board but it was not mentioned in the prospectus. The board later refused consent to the company and it had to wrap up. The plaintiff sued the directors for fraud. The court held that the directors in all honesty believed that they had authority as the act of the parliament pragmatically indicated the consent of the board as well and thus, they were not guilty of fraud. Lord Herschell defined fraud as,

“Fraud is proved when it is shown that a false representation has been made,—

(1) knowingly, or

(2) without belief in its truth, or

(3) recklessly careless whether it be true or false.”

Consider the following examples:- 

1. Penny makes Sheldon agree to buy her flat by lying to him that Sheldon’s idol Stephen Hawking lives in the same building. Penny commits fraud as she knew that it is not true.

2. A company was suffering from financial loss and were due to pay some debentures. The directors raised money by leading people to believe that the amount was for the development of the company and to start new projects and complete the ongoing ones. They committed fraud. (Edington v. Fitzmaurice (1885) 29 Ch. 459)

2.     Active concealment of truth

Clause (2) of section 17 describes that active concealment of a fact that a person knows to be the truth is a fraud. This clause is to be read collectively with the explanation provided under the section. For example, if a person while buying life insurance actively conceals his health problems from the insurer, then he commits fraud. (P. Sarojam v. LIC, AIR 1986 Ker 201; AIR 2008 SC 424)

However, mere silence which is commonly referred to as passive concealment regarding material facts is not fraud unless there is a duty to speak or where silence constitutes speech. A party does not have any duty to reveal all the information regarding the subject matter of the contract. For example, if a person sells an unsound horse, he is not bound to reveal anything about the quality of the horse up front. However, the case differs in one of the two situations mentioned as:-

i.                 Duty to speak

There arises a duty to speak of a party where trust is reposed by the other party and that confidence is accepted by the party. For example, a broker has the duty to reveal all information about a sale to his client. If he does not reveal some material fact that might possibly affect the will of the client then he commits fraud. A fiduciary relationship exists between the broker and the client as the client trusts that the broker would get him the best deal. Thus, there arises a duty to speak in such a case. However, in cases where no fiduciary relationship like this exists, there is no liability on any contracting party for not speaking.

Contracts of insurance are a perfect example where such duty arises on part of the insured person as the insurance company know nothing about the life of the insured and they have to completely rely on the insured person to give them information. They are often referred to as uberrima fides (utmost good faith) contracts. (Life Insurance Corpn. of India v. Asha Goel, A.I.R. 2001 S.C. 549) The duty that arises in such cases is not merely a moral duty but a legal duty. 

ii.               Silence is equivalent to speech

Silence can be as deceptive as words. Mere silence does not constitute fraud. However, in cases where silence becomes equivalent to speech, it becomes deceptive and may amount to fraud. For example, an unsound horse is up for sale. The buyer communicates to the seller, “I shall assume the horse is sound and healthy if you do not deny it”. The seller says nothing even after being aware of the unsoundness of the horse. Here the seller’s silence is the same as speech and thus the seller has committed fraud.

3.     Fake promise

Clause (3) mentions the act of promising something to the party to get his consent which the promisor has no intention to fulfil. For example, purchasing goods with no intention to pay for them (Clough v. London & N.W. Rly Co, (1871) LR 7 Exch 26), or getting a home loan but not using it to buy a house, etc. To prove this type of fraud it must be shown that there was no intention at the time of making the promise. (Dagdu Valad Sadu v. Nana Valad Salu, (1910) 35 Bom 93 at 96)

4.     Any other deceiving act

This act of committing fraud is included in the definition as a cautionary measure. As the definition is exhaustive and does not include anything other than what is specifically mentioned, a broad category would offer the parties relief in cases where the deceiving act does not fit in any of the other more specific categories. For example, A and B are entering into a contract wherein A is buying B’s share in a joint property for $1,000. B’s lawyer draws up the contract and sends it to A for signing. A noticed that in the clause which mentions the amount to be paid it says $10,000 instead of $1,000. He does not inform this to B and instead uses this error to his advantage to gain more money. A commits fraud and B is entitled to get the contract annulled.

5.     Any act or omission which is specifically declared to be fraudulent

This category of fraud includes fraudulent acts defined under different legislations. For example, Section 55 of the Transfer of Property Act specifies that the seller has a duty to disclose all facts regarding an immovable property which are material to the sale and which might be of interest to the buyer before the sale goes through. It further states that an omission to make such a disclosure is fraudulent in the eyes of law. Such fraud would be understood as a fraud of this category under the meaning of this act. This clause similar to the one above seems to be included here in this section to make an airtight definition of fraud and make sure all kinds of fraudulent acts are covered under the act. 

A contract where the consent is given due to fraud can be avoided by the party whose consent in such the case was not free. The party who has been defrauded also has the option of demanding that the contract be followed and he be put in the same position as he would be in if the representations that are made were true.

A party would not have the above remedies if it had the facts before it or had the means of knowing them. For example, Richard sells an unfit chicken to Izzie who intends to use it for breeding. Before buying Izzie confirmed with Richard if the bird was in a good condition. Richard assured her about the good quality of the chicken. Izzie is a farmer who has also been occasionally involved in animal husbandry and has supposedly good knowledge about birds. Izzie had the means of knowing the truth and thus, cannot claim that she has been defrauded.  Another example, in the case of Shri Krishan v. Kurukshetra University(A.I.R. 1976 S.C. 376.) the plaintiff failed to attend the compulsory number of lectures rendering himself ineligible to apply for the examination. He, however, filled the application form without mentioning this fact. The university wished to cancel the candidature of the plaintiff. The court did not allow them to do so and held that the plaintiff just remained silent and the university would have known the truth had they subjected the applications to strict scrutiny. 

By

LawVastutah

References

1. Indian Contract Act, 1872
2. Pollock & Mulla, The Indian Contract and Specific Relief Acts, 16th edition.
3. Avtar Singh, Contract and Specific Relief, 12th edition.
4. Halsbury’s Laws of India Contract, 2e 2015.