Contract Law: Free Consent: Fraud

FRAUD

When the consent of a party to the contract has been obtained by fraud, the consent is not free consent which is necessary for the formation of a valid contract. In such a case the contract is voidable at the option of the party whose consent has been so obtained (Section 19). Fraud or deceit is also a tort, for which an action for damages can also lie. Section 17 defines fraud as follows:

"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 to 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) 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."

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 speak2 , or unless his silence is, in itself, equivalent to speech.

Illustrations

(a) A sells, by auction, to B, a horse which A knows to be unsound. A says nothing to B about the horses unsoundness. This is not fraud in A.

(b) B is As daughter and has just come of age. Here, the relation between the parties would make it As duty to tell B if the horse is unsound.

(c) B says to A—"If you do not deny it, I shall assume that the horse is sound." A says nothing. Here, As silence is equivalent to speech.

(d) A and B, being traders, enter upon a contract. A has private information of a change in prices which would affect Bs willingness to proceed with the contract. A is not bound to inform B. 

In State of Andhra Pradesh v. T. Suryachandra Rao, AIR. 2005 S.C. 3110 the respondent surrendered certain land as found surplus under the Ap Land Reforms (Ceiling on Agricultural Holdings) Act, 1973. Subsequently, it was noticed that the land which was surrendered had already been acquired in proceedings under the Land Acquisition Act, 1898. Holding it a case of fraud on the part of the respondent, the Apex Court explained:

By "fraud" is meant an intention to deceive; whether it is from any expectation of advantage to the party himself or from the ill will towards the other is immaterial. The expression "fraud" involves two elements, deceit and injury to the person deceived. Injury is something other than economic loss, that is, deprivation of property, whether movable or immovable or of money and it will include any harm whatever caused to any person in body, mind, reputation or such others.

According to Section 17, following are the essentials of fraud:

I.                    There should be a false statement of fact by a person who himself does not believe the statement to be true.

II.                 The statement should be made with a wrongful intention of deceiving another party thereto and inducing him to enter into the contract on that basis

I.                   False statement of fact [Section 17(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.

If A intending to deceive B, falsely represents that five hundred maunds of indigo are made annually at A's factory, and thereby induces B to buy the factory, the contract is voidable at the option of B. (Illustration (a) to Section 19)

Mere silence is no fraud

Explanation to Section 17, in this connection, incorporates the following provision:

"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."

A contracting party is not obliged to disclose each and everything to the other party. If a person is to sell his goods, he is under no duty to disclose the defects in his goods. If he makes false statement as to the quality of his goods, it would be fraud, but if he merely keeps silence as regards the defects in them, there is no fraud. In case of sale of goods, the rule is caveat emptor, i.e., buyer beware, which means that it is the duty of the buyer to be careful while purchasing the goods, and there is no implied condition or warranty by the seller as to the quality or fitness of the goods for any particular purpose."

If A sells, by auction, to B, a horse which A knows to be unsound and A says nothing to B about the horse's unsoundness. This is not fraud in A. (Illustration (a) to Section 17).

Similarly, if A and B, being traders, enter upon a contract. A has private information of a change in prices which would affect B's willingness to proceed with the contract. A is not bound to inform B. (Illustration (d) to Section 17)

In Keates v. Lord Cadogan, (1851) 10 C.B. 591 A let his house to B which he knew was in ruinous condition. He also knew that the house is going to be occupied by B immediately. A did not disclose the condition of the house to B. It was held that he had committed no fraud.

Exceptions

Although as a general rule, mere silence or non-disclosure of facts do not amount to fraud, but in some exceptional cases keeping silence may be deemed to be an act of deception. Explanation to Section 17, which mentions the rule that mere silence is not fraud also mentions the following two exceptions:

(i) When there is duty to speak, keeping silence is fraud.

(ii) When silence is, in itself, equivalent to speech, such silence is a fraud. -Utmost good

(i)                 Duty to speak (Contracts Uberrima Fides)

 When the circumstances of the case are such that, regard being had to them, it is the duty of the person keeping silence to speak, keeping silence in such a case amount to fraud. When there is a duty to disclose facts, one should do so rather than to remain silent. By remaining silent, one may be responsible for creating a false impression in the mind of the other. Certain contracts are contracts uberrima fides, i.e., contracts of utmost good faith. In such a case, it is supposed that the party in whom good faith is reposed would make full disclosures and not keep silent. Suppression of truth in such cases is equivalent to suggestion of falsehood. Withholding the facts, which ought to be disclosed, is fraud. For example, contracts of insurance are contracts uberrima fides (of utmost good faith). Since some of the facts may be in the insurer knowledge of the insured, he must make full disclosures to the insurer. 

V. Srinivasa Pillai v. L.I.C. of India, A.I.R. 1977 S.C. 381.

Life Insurance Corpn. of India v. Asha Goel A.I.R. 2001 S.C. 549

In interpreting documents relating to a contract-of-insurance, the duty of the Court is to interpret the words in which the contract is expressed by the parties, because it is not for the Court to make a new contract, however reasonable, if the parties have not made it themselves.

Non-disclosure of facts not-material

Even in case of insurance contracts, where duty to disclose is generally there, the non-disclosure of the facts, which are not material and have no bearing on the risk undertaken by the insurer, does not render the agreement voidable.

In Bhagwani Bai v. L.I.C. of India, A.LR. 1984 M.P. 126, it has been held by the M.P. High Court that the non-disclosure of information about the lapsed policies by the assured has no bearing on the risk undertaken by the insurer, and the same, therefore, does not amount to fraudulent misrepresentation so as to entitle the insurance corporation to repudiate the contract on that ground.

Marital Status-Non-disclosure

Non-disclosure of material facts relating to parties to marriage has been held to constitute fraud within the meaning of Section 17 of the Indian Contract Act, 1872.

Kiran Bala v. Bhaire Prasad Srivastava, ALR. 1982 M.P. 242. (dissolution of first marriage due to unsound mind)

Rajinder Singh v. Pomilla, AIR. 1987 Delhi 285. (earlier marriage ending with divorce)

(ii)              Silence being equivalent to speech

Sometimes keeping silent as to certain facts may be capable of creating an impression as to existence of a certain situation. In such a case, silence amounts to fraud. For example, 

B says to A-"If you do not deny it, I shall assume that the horse is sound." A says nothing. Here A's silence is equivalent to speech. (Illustration (b) to Section 17)

B is As daughter and has just come of age.In this case, the relation between the parties would make it A's duty to tell B if the says horse is unsound. (Illustration (c) to Section 17)

Means of discovering the truth

In cases where silence is fraudulent, but the other party can discover the truth by ordinary diligence, he cannot avoid the contract. In this connection, the provision in the Indian Contract Act (Exception to Section 19) is as under:

"If such a consent was caused by misrepresentation or by silence, fraudulent within the meaning of Section 17, the contract, nevertheless, is not voidable, if the party whose consent was so caused had the means of discovering the truth with ordinary diligence."

In Shri Krishan v. Kurukshetra University, AIR. 1976 S.C. 376 Shri Krishan, a candidate for the LL.B. Part I examination of the University did not complete the prescribed number of lectures which could make him eligible for appearing in the examination. He, however, filled the examination form for appearing in the examination without mentioning the fact that his attendance was short. The University authorities could have discovered the truth by proper scrutiny. The University wanted to cancel the candidature of the candidate on the ground of fraud. It was held that there was no fraud in this case as the candidate had just kept silent as to certain facts and further, the University authorities could have discovered the truth with ordinary diligence.

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. Active concealment is different from merely keeping silent as to certain facts. By an 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.

Illustrations

1. B, having discovered a vein of ore on the estate of A, adopts means to conceal, and does conceal, the existence of the ore from A. Through A's ignorance, B is enabled to buy the estate on an undervalue. The contract is voidable at the option of A. (Illustration (d) to Section 19)

2. 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. (Illustration (c) to Section 19)

Promise made without any intention to perform it [Section 17(3)]

When a person makes a promise, there is deemed to be undertaking by him to perform it. If there is no such intention when the contract is being made, it amounts to fraud. (Section 17(3).) Thus, if a man takes a loan without any intention to repay, or when he is insolvent, purchases goods on credit without any intention to pay for them, there is fraud. If, however, there is no such wrongful intention at the time of making of the contract, but the promisor does not perform the contract, it does not amount to fraud. 

Any other act fitted to deceive [Section 17(4)] Ningawwa V. Byrappa Shiddappa Hireknarbar AIR 1968 SC 956. In this case the expression “any other act fitted to deceive” mentioned in the section 17 was brought into light. The facts of this case were such that a husband, in order to gain advantage of the illiteracy of his wife made her to sign a document that he claimed had the documents of two lands but actually contained the documents of four lands. The court held that the act done with an intention to deceive and would subsequently come under the purview of fraud.

We have already noted that either a false statement of fact, or active concealment, or a promise made without any intention to perform it have been declared to be fraudulent according to clauses (1), (2) and (3) respectively, to Section 17. Clause (4) further provides that "any other act fitted to deceive" will also amount to fraud. This clause is general-and is intended to include such cases of fraud which would otherwise not come within the purview of the earlier three clauses.

Any act or omission which the law declares as fraudulent [Section 17(5)]

According to Section 17(5), fraud also includes any such act or omission as the law specially declares to be fraudulent. In some cases, the law requires certain duties to be performed, failure to do which is expressly declared as a fraud. For instance, Section 55, Transfer of Property Act, 1882 declares certain kinds of omissions on the part of the seller or the buyer as fraudulent. It provides that:

1. The seller of immovable property is bound to disclose to the buyer any material defect in the property or in the seller's title thereto of which the seller is, and the buyer is not aware, and which the buyer could not with ordinary care discover (Section 55(1)(a), Transfer of Property Act, 1882), and

2. The buyer of immovable property is bound to disclose to the seller any fact as to the nature or extent of the seller's interest in the property of which the buyer is aware, but of which he has reason to believe that the seller is not aware and which materially increases the value of such interest, Section 55(a), and an omission to make the above stated disclosure is fraudulent.

In Akhtar Jahan Begam v. Hazarilal, A.I.R. 1927 All. 693 A sold some property to B stating in the sale deed that he would not 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 did not inform B about it. It was held that A had committed fraud and the contract was voidable at the option of B.

II.                   Wrongful intention

In order to constitute fraud, it is necessary that a person should intentionally make a false statement with an intent to deceive another party thereto to induce him to enter into the contract. If the intention to deceive the other party is absent, there is no fraud. It may, in such a case, be a mere misrepresentation as defined in Section 18 of the Act.

In Derry v. Peek, (1889)14 A.C.337, the directors of a company issued a prospectus stating that they had got the authority to run tramways with steam or mechanical power instead of animal power. In fact, a plan had been submitted for the same and the directors honestly believed that the Board of Trade, who had to accord its sanction for the same, would do so as a matter of course. The Board of Trade refused the sanction and the company had to be wound up. The respondent, who had taken shares in the company on the faith of the representation by the directors in the prospectus, brought an action for the tort of deceit. It was held by the House of Lords that since the statement had not been made with an intention to deceive, there was no fraud. Lord Herschell stated the law on the point in the following words:

In order to sustain an action of deceit, there must be proof of fraud, and nothing short of that will suffice. 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, carelessly whether it be true or false.

Contract on the basis of false statement

It is necessary that the false statement must have been made to induce the other party to enter into the contract. In case of fraud the contract is voidable at the option of the party whose consent has been so obtained. In Bindu Sharma v. Ram Prakash Sharma, A.IR. 1997 All. 429 the petitioner (wife) was having higher academic qualification than her husband. The respondent gave her consent for marriage on a representation by the husband that he was having a regular attractive job. In fact, the respondent was undergoing apprenticeship training in a factory. It was held to be a case of misrepresentation and on that ground a decree for annulment of marriage was granted to the petitioner. If in spite of the false statement he was not misled, or did not enter into the contract on that basis, there is no fraud.

This may be explained with the help of the following illustrations (Illustrations (a) and (b) respectively, to Section 19):

(a) A, intending to deceive B, falsely represents that five hundred maunds of indigo are made annually at A's factory, and thereby induces B to buy the factory. The contract is voidable at the option of A.

(b) A, by a misrepresentation, leads B erroneously to believe that five hundred maunds of indigo are made annually at A's factory. B examines the accounts of the factory, which show that only four hundred maunds of indigo have been made. After this, B buys the factory. The contract is not voidable on account of A's misrepresentation. In case it appears from the facts that even though there was a false statement but the other party has the means to know the correct position and ought to have known the truth, there is no fraud.

Proof of Fraud

Fraud is essentially a question of fact, and the person who alleges that, has to prove the same. If the plaintiff seeks the annulment of the decree on 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 or misrepresentation. Merely making a mention of fraud or misrepresentation in the pleadings is not enough.