FRAUD
Fraud means dishonestly making a false, untrue or misleading representation with a view to gain or with intention to cause loss. If the fraud results in injury to the deceived party, he/ she may claim damages for the tort of deceit. A contract obtained by fraud is voidable on the grounds of fraudulent misrepresentation.
ACCORDING TO SECTION 17 OF THE INDIAN CONTRACT ACT, 1872
“FRAUD” means and includes any of the following acts committed by a party to a contract, or by his agent, with intent to deceive another party thereto or his agent, or to induce him to enter into the contract:
- 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.
ESSENTIALS OF FRAUD
The essentials of fraud are as follows:
FALSE STATEMENT OF FACT: SECTION17 (1)
In order to constitute fraud, it is necessary that there should be a statement of fact which is not true. Mere expression of opinion is not enough to constitute fraud.
For example: A person, who is aged over 60 years and thus beyond insurable age, deliberately makes a false statement that his age is 48 years in order to take out an insurance policy, it amounts to fraud, and the insurer is entitled to avoid the policy.
CASE: EDINGTON VS. FITZMAURICE
In a company was in great financial difficulties and needed funds to pay some pressing liabilities. The company raised the amount by the issue of debentures. While raising the loan, the directors stated that the amount was needed by the company for its development, purchasing assets and completing buildings. It was held that the directors had committed a fraud.
ACTIVE CONCEALMENT: SECTION 17(2)
When there is an active concealment of a fact by one having knowledge or belief of the fact, that can also be considered to be equivalent to a statement of fact, and amount to fraud. By active concealment of certain facts, there is an effort to see that the other party is not able to know the truth and he is made to believe as true which is in fact not so.
Example: A is entitled to succeed to an estate at the death of B. ‘B’ dies. C having received intelligence of B’s death, prevents the intelligence reaching ‘A’ and thus induces A to sell him his interest in the estate. The sale is voidable at the option of A.
PROMISE MADE WITHOUT ANY INTENTION TO PERFORM IT: SECTION 17(3)
When a person makes a promise, there is deemed to be an undertaking by him to perform it. If there is no such intention when the contract is being made, it amounts to fraud. Thus, if a man takes a loan without any intention to repay, or when he is insolvent, or purchases goods on credit without any intention to pay for them, there is fraud. If, there is no such bad intention at the time of making contract, but the promise doesn’t perform the contract, it doesn’t amount 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 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 Transfer of Property 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.
CASE: AKHTAR JAHAN BEGAM vs. HAZARILAL
A sold some property to B stating in the sale deed that he won’t be liable to B if he suffered any loss owing to A’s defective title. A had, earlier to this transaction, sold this property to somebody else, but didn’t inform B about it. It was held that A had committed fraud and the contract was voidable at the option of B.
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
STATEMENT SHOULD BE MEANT FOR THE PARTY MISLED
It is necessary that the misleading statement should be meant for the party who is misled. If a person is purchasing the shares of the company on the basis of any prospectus then he can’t sue the company later on because the prospectus is meant for an original allottee of the shares by the company, not for the person like the present appellant who buys the shares from the original allottee and therefore, the promoters were not liable for fraud.
THE OTHER PARTY MUST SUFFER LOSS
To constitute a fraud, under the Indian Contract Act, 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.
CONSEQUENCES OF FRAUD
According to Section 19 where 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.
MERE SILENCE IS NOT FRAUD
Every silence is not a fraud. According to Sec. 17, Mere silence as to the facts does not amount to fraud. A party to the contract does owe no gratitude to disclose the whole truth to the other party.
The Rule of Caveat Emptor is applicable here that is Buyer Beware principle. This principle means that the buyer should be aware of things while making the contract. In these cases there is no duty to speak and silence does not result to fraud. When both the parties are aware of the contract, there is no duty to disclose the facts.
EXCEPTIONS
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:-
- 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.
- 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.
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 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.
- 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 Transfer of Property 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.
- 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, the 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.
CONCLUSION
Fraud is essentially a question of fact and the person who alleges that has to prove the same. If the plaintiff seeks the compensation the ground of fraud or misrepresentation, he has to specifically plead the same and mention the circumstances which can lead to the conclusion of the existence of fraud. Merely making a mention of fraud or misrepresentation in the pleadings is not enough.
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