Any deceitful act performed by a person for their own gain can be termed as fraud. Section 17 of the Indian Contract Act, 1872 defines fraud 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 of 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.”
This section carefully outlines the definition of fraud. Any act which a person commits to influence another person in signing of a contract with no means to actually perform his part can be termed as fraud; this act has to be deceitful to be constituted as fraud. There should be no intention of committing the act in the first place. According to the definition the statement(s) made by the party intending to commit fraud, should be untrue; there can also be concealment of some facts which the party knows it is deliberately hiding. Fraud can also entail any false promises with no intention of doing it. Due to these acts, there may either be gain of the fraudulent party or loss of the other party.
Illustration: A sells to B a vase which is from the 19th century but A tells B it is a 16th-century vase. A commits fraud by making false statements to B for a wrongful gain of his own.
Essentials of Fraud
Fraud is only constituted when it meets the following criteria:
- The facts in the contract should be untrue to constitute fraud.
- The party making these false statements should be aware that these statements are false and deceitful; it would not be fraud if the party believes the statements to be genuinely true.
- The statement should have been made by the party or their agent on the party’s instruction; any third party making these statements would not affect the contract.
- The statements should be deceitful.
- There should be action based on these deceitful statements; there should be some loss suffered due to this fraudulent activity.
Does Silence amount to Fraud?
Silence will only amount to fraud when there is a duty of one party to speak and that party in turn does not do the same. The general rule regarding fraud is that if someone maintains their silence, it will not always amount to fraud. If a person does not deliberately say something that he is bound to tell the other party then it shall amount to fraud as his aim was deceitfully entering the other party into a contract whose facts are not true. Herein, Caveat Emptor which means buyer beware is applied as natural diligence and prudence should be applied by the buyer when purchasing something.
In Keats v Cadogan, the defendant was subletting his house to the plaintiff but the house was not in a good condition and the defendant failed to tell the plaintiff the same. The judgement was given in favour of the defendant as mere silence amounts to no fraud.
Illustration: A buys a red Ford from B. There is a dent at the side of the ford which B maintains his silence about. Later A wants to rescind the contract based on the fact that B committed fraud. Herein, B has not committed fraud as the dent would have been visible and here A should have applied Caveat Emptor and diligence to judge the same before the purchase.
There are four exceptions when silence does amount to fraud.
Silence amounts to Speech
When there is a clause where silence will amount to speech and the fraudulent party maintains their silence when there is a need to speak, then it will amount to fraud.
Illustration: X says to Y that if he does not say anything then X will assume that the horse that Y is selling to X is sound. Y does not say anything. Later, X finds out that the horse in question is unsound. X sues Y. Y is liable as here his silence amounted to speech.
Duty to Speak
A person has a duty to speak in three cases:
- There is a fiduciary contract between the parties where the contract is based mostly on trust. Under this, there is a duty to speak as there is the added element of trust.
- The contract is that of guarantee; there is a duty to speak when there is such a circumstance as it is a contract based on surety.
- The contract is based in good faith (uberrima fides). Example: An Insurance Contract.
Illustration: P, the daughter of Q, buys a horse from him. The horse is unsound and Q is bound to tell P as this contract is a fiduciary contract and its basic element is trust.
If the fraudulent party tells the half-truth, it is bound to tell the whole truth otherwise he is guilty of fraud.
Deceit in Marriage
Important facts should be disclosed to both parties by both the parties before marriage. In the case of Kiran Bhala v. Bhaire Prasad Srivastava, the bride’s first marriage was annulled due to the fact that the bride was not of sound mind. The same was not disclosed to the groom and his family. Hence, it was held that there has been fraud committed by the bride’s family as the consent could have changed due to this factor. So, there was no free consent as defined in Section 13 of the Indian Contract Act, 1872.
In the case of Bell v. Lever Bros, the directors of the company, who were subsidiary, were removed from the post. The company paid a large amount as compensation to them. However, the company later discovered that these directors were liable for breach of duty and filed a suit for the wrongful compensation under fraud. The House of Lords gave the judgement that it was not fraud as they did not have a duty to speak for the same.
Fraud and Misrepresentation
The difference between fraud and misrepresentation is that of intention. Misrepresentation is defined in Section 18 of the Indian Contract Act, 1872 as,
““Misrepresentation” means and includes—
(1) the positive assertion, in a manner not warranted by the information of the person making it, of that which is not true, though he believes it to be true;
(2) any breach of duty which, without an intent to deceive, gains an advantage to the person committing it, or any one claiming under him; by misleading another to his prejudice, or to the prejudice of any one claiming under him;
(3) causing, however innocently, a party to an agreement, to make a mistake as to the substance of the thing which is the subject of the agreement.”
In fraud the fraudulent party knows that it is deceiving the other party and has the intention to do the same. However, in misrepresentation the party stating facts genuinely believes them to be true even if they are not true. It is quite innocent on the party’s behalf even though the facts are wrong. In fraud, the fraudulent party has to pay or repatriate for the loss incurred by the other party. In a misrepresentation, the contract is voidable but no damage has to be paid as there was no intention to deceive and moreover, there was no fault of the party.
The aggrieved party must be compensated by the fraudulent party as it has incurred losses due to this act. The remedy will be provided by the court once the matter settles. It can be compensation or restoration of the property. The fraudulent party should also restore damages caused in consequence to the act and the losses again incurred by the aggrieved party due to the same.
Illustration: A sells to B an earring which is not real gold but A lets B believe the same. A is liable to compensate B for the price of actual gold versus the jewellery provided to her.
Fraud completely declines the right to free consent. It is not legal but also immoral in its own sense. To prove fraud there has to be proof and complete diligence on the part of the plaintiff to nullify caveat emptor. If it is proved that the contract was influenced by fraud then the court will provide remedies to the aggrieved party.
- The Indian Contract Act, 1872 (Act No. 09 of 1872), s. 17.
- (1851) 10 C.B. 591.
- Kiran Bhala v Bhaire Prasad Srivastava, AIR 1982 M.P. 242.
- The Indian Contract Act, 1872 (Act No. 09 of 1872), s. 13.
- (1931) UKHL 2.
- The Indian Contract Act, 1872 (Act No. 09 of 1872), s. 18.
BY MANASVITA TEJSI | RAJIV GANDHI NATIONAL UNIVERSITY OF LAW, PATIALA