Very often facts are misrepresented, that is, they are declared in a distorted manner. When facts are intentionally misrepresented, it is known as fraud , which is dealt with in Section 17 of the ICA. However, unintentional or innocent misrepresentation is not fraud. They are simply misrepresentation falling under Section 18 of the Act. Thus, where a false statement is made intentionally, with the knowledge that it is false, with a view to deceive the other party and thereby inducing him into entering the contract – it is known as fraud .
But when the person making the false statement believes the statement to be true and does not intend to deceive the other party to enter into the contract – it is known as misrepresentation.
Thus it can be said that fraud is a willful misrepresentation or a fraudulent misrepresentation and includes all the acts committed by a person to deceive the other .
Section 17 of the Act 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 agents, with intent to deceive another party thereto his agent, or to induce him to enter into the contract.
Section 17 (1) – the suggestion as to a fact of that which is not by one who does not believe it to be true – is known as SUGGESTIO FALSI or suggestion of falsehood.
Section 17 (2) – the active concealment of a fact by one having the knowledge or belief of the fact – is known as SUPPRESIO VERI or suppression of a fact.
Section 17 (3) – a promise made without any intention of performing it. It means a promise made falsely with the intention of inducing the other party to make a reciprocal promise and thereby enter into a contract.
Section 17 (4) – any other Act fitted or designed to deceive.
Section 17 (5) – any such act or omission as the law specially declares to be fraudulent
Explanation to Section 17
This Explanation states a very important proposition of law. According to Explanation to Section 17 – the mere silence as to a fact likely to affect the willingness of a person to enter into a contract is not fraud. However, such silence is to be held as fraud , if the circumstances of the case that –
- It is the duty of the person keeping silence – to speak
- That his silence in itself is equivalent to speech.
Essentials of Fraud
Analyzing the definition of fraud under Section 17 , we get the following essential elements of fraud –
- 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
- There must be a false representation or assertion – Section 17 (1)
To constitute fraud there must be conjugation of 2 things –
- A representation or assertion of a fact which is not true and
- The person making such representation or assertion of fact does not believe it to be true.
This is what is meant by suggestio falsi or suggestion of falsehood coupled with the knowledge of its falsity.
- There must be active concealment of fact – Section 17 (3)
By active concealment of certain facts there is an effort to see that the other party is not able to know or discover the truth. He is made to believe something is true whereas that is false. This is known as SUPPRESIO VERI or suppression of fact purposefully.
The implication of such active concealment is more grave where it is the duty of the person to disclose – fiduciary relationship.
B having discovered a vein of iron ore in the estate of A adopts means to conceal and is successful to conceal the existence of the ore from A. through A’s ignorance he buys that estate at an under value.
It is a voidable contract under Section 2(1) of the Act. So A may cancel the contract because it is a fraud committed against him by B. the fraud is a fraud of concealment of fact.
- A promise made without the intention of performing it – Section 17(3)
When a person makes a promise then it is deemed to be an undertaking by him that he will perform the promise. According to Section 17(3) if there is no such intention to perform the contract, at the time when the contract was made, it amounts 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 suggestio falsi, suppresio veri or 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 TP 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.
- Representation must relate to a fact-
The representation, assertion, intention or suggestion under Section 17(1) must relate to a material fact.
Any superfluous opinion or exaggerated statement or flourishing description are not regarded as representation of facts.
A while selling rings to B says – ” the rings are as good as that of Y.” this is a mere statement of opinion which cannot be regarded as amounting to fraud.
- Wrongful intention –
To constitute a fraud it is necessary that a person should intentionally make a false statement to deceive another party and thereby induce him to enter into a contract. If the intention to deceive the party is absent, there is no fraud – vide case of DERRY vs. PEEK.
- The acts must have in fact, deceived the party –
A mere attempt to deceive the party is not fraud under the ICA unless the party is actually deceived. Fraudulent misrepresentation must have been made with an intention to deceive. According to the Explanation appended to Section 29 of the Act, deceit which does not deceive does not amount to fraud and cannot hence make the contract voidable.
- The other party must suffer loss –
To constitute a fraud, under the ICA, 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.
Mere silence / non-disclosure vis-a-vis Fraud
According to Section 11, in order to constitute fraud there must be a false representation or assertion of a fact – vide Section 17(1). In other words, there could be suggestio falsi coupled with the knowledge of its falsity.
Active concealment of a fact has also been considered as amounting to fraud because in that case there is a positive effort to conceal the truth from the other party. He is made to believe as true that fact which false. This is what is known as suppresio veri – vide Section 17(2).
At the same time it may be mentioned here that Explanation to Section 17 lays down that mere silence as to facts does not amount to fraud. It states that – mere silence as to facts does not amount o fraud unless it is the duty of the person keeping silence to speak or when his silence is equivalent to speech.
Thus a person is required by law to refrain from intentional or active concealments as to facts. But it does not mean that he is to disclose all material defects of the contract to the other party. A contracting party is under no compulsion or obligation to point out the defects as to the subject matter of the contract to the other party.
If a person is to sell his goods he is under no obligation to disclose the defects in his goods, but if he makes an intentional false statement as to the quality of his goods, it will amount to fraud as under Section 17(1). If he indulges in any Act amounting to active concealment of facts it will constitute to fraud under Section 17 (2). But if he merely keeps silence it will not constitute fraud subject to certain exceptions.
In case of sale of goods, the rule which is applicable is caveat emptor – or the doctrine of let the buyer beware. It means that it is the duty of the buyer to be careful while purchasing the goods as there is no implied condition or warranty as to quality or fitness of goods.
A sells by auction to B, a horse which A knows is of unsound mind. A says nothing of the unsoundness of the horse. A has not committed fraud as mere silence does not amount to fraud.
Case Law – SHRI KISHAN vs. KURUKSHETRA UNIVERSITY
S, a candidate for the LLB Part I Examination who was short of attendance did not mention that fact himself in the form. Neither the head of the law department nor the university authorities made proper scrutiny to discover the truth.
The Supreme Court held that there was no fraud by the candidate as he merely kept silent as to his attendance which the authorities could have discovered had proper scrutiny been made. The university had no power to cancel the candidature of the candidate on that ground.
Exception to the rule – mere silence / non-disclosure amount to fraud
Explanation to Section 17 mentions that mere silence or non-disclosure does not amount to fraud, other than certain statutory exceptions –
- When there is a duty to speak keeping silence is fraud.
- When silence itself is equivalent to speech.
- Duty to speak –
- 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.
CASE LAW – V. SRINIVASA PILLAI vs. LIC of INDIA.
It was held in this case by the Supreme Court that contract of insurance being one of uberrimae fedei, it is normal to expect in such a contract utmost good faith on the part of the insured. The insured is expected to answer certain questions by the insurer and it is his responsibility to give true and faithful answers. If the insured has knowledge of certain facts which others cannot ordinarily have, then he should not indulge himself in suggestio falsi or suppressio veri.
When in the case of contract of insurance, where there exists a duty to disclose , then non disclosure of facts that are non-material to and having no bearing on the risk undertaken by the insured, it does not render the contract voidable.
- 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.
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.
iii. 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.
iv. 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 TP 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.
Section 150 of the ICA envisages a duty of the bailor to disclose faults in goods bailed failing which he may be held liable for damages.
v. 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.
2. When silence is equivalent to speech –
A person who keeps silence knowing fully well his silence is going to be deceptive – is no less guilty of fraud.
Sometimes, keeping silence as to a certain fact may create an impression as to the existence of such facts. In such a case silence amounts to fraud.
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.
Consequences of fraud
According to Section 19 where a 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.
3. Fraud is a tort. Thus, the aggrieved party can in a case of fraud , apart from rescinding the contract, can file a suit to claim damages.
4. He may enforce the principle of restitution against the other party – under Section 64 of ICA.
5. He may insist for a decree of specific performance of the contract minus the element of fraud.