What is Fraud? What are its essential ingredients? Is silence amounts to Fraud?

Question: What is Fraud? What are its essential ingredients? Is silence amounts to Fraud? [MPJS 2017]

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Answer

Consent is said to be so caused when it would not have been given but for the existence of such coercion, undue influence, fraud, misrepresentation, or mistake. Intentional misrepresentation of facts, speaking broadly is called “fraud”.

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 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. 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.”

When analyzed Section 17 (1) shows the following ingredients:

1. 1. There should be a suggestion as to a fact;
   2. The fact suggested should not be true;
   3. The suggestion should have been made by a person who does not believe it to be true; and
   4. The suggestion should be made with intent either to deceive or to induce the other party to enter into the contract

In English law “fraud” is defined in the well-known decision of The House of Lords in Derry v Peek [(1889) LR 14 AC 337] Lord Herschell said:

“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.”

Intentional misrepresentation: In the Derry vs Peek case: A company’s prospectus contained a representation that the company had been authorized by a Special Act of Parliament to run trams by steam or mechanical power. The authority to use steam was, in fact, subject to the approval of the Board of Trade, but no mention was made of this. The Board refused consent and consequently, the company was wound up. The plaintiff, having bought some shares, sued the directors for fraud. But they were held not liable. They were not guilty of fraud as they honestly believed that once the Parliament had authorized the use of steam, the consent of the Board was practically concluded. It follows, therefore, that the person making a false representation is not guilty of fraud if he honestly believes in its truth. Thus intentional misrepresentation is the essence of fraud.

Promise made without the intention of performing it: Making a promise without intending to perform it is fraud. This species of fraud does not appear to require any misrepresentation of fact, but it is a representation of the promisor’s intention of performing it. It must be shown that the promisor had no intention of performing the promise at the time of making it, and any subsequent conduct or representation is not considered for his purpose. If a person buys goods without any intention of paying for them, there is fraud. Similarly, there is fraud if a person induces another to enter into a deed of exchange when he had no intention of offering an equivalent property in exchange

Mere silence is no fraud: It has been noted above that to constitute fraud; there should be a representation as to be certain untrue facts. Active concealment has also been considered to be equivalent to a statement because in that case, there is a positive effort to conceal the truth and create an untrue impression on the mind of the other. Mere silence, however, as to facts in 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 under no obligation to disclose the whole truth to the other party or to give him the whole information in his possession affecting the subject matter of the contract. It is under this principle that a trader may keep silent about a change in prices. A seller who puts forth an unsound horse for sale, but says nothing about its quality, commits no fraud.

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’ didn’t disclose the condition of the house to ‘B’. It was held that he had committed no fraud.

In Shri Krishan v. Kurukshetra university [A.I.R. 1976 S.C. 376], Shri Krishan, a candidate for the L.L.B. part1 exam, who was short of attendance, did not mention that fact himself in the admission form for the examination. Neither the head of the law department nor the university authorities made proper scrutiny to discover the truth. It was held by SC that there was no fraud by the candidate and the university had no power to withdraw the candidate on that account.

However, there are two exceptions to the general rule that silence doesn’t amount to fraud. They are:

1. When there is a duty to speak, keeping silence is a fraud (contract of uberrima fides. i.e of utmost faith).

A good example is the non-disclosure of material facts relating to parties to the marriage that will constitute fraud within the meaning of Section 17. This was held in:

Kiran Bala v. Bhaire Prasad Srivastava [A.I.R. 1982 M.P. 242] where the first marriage of the appellant, Kiran Bala, had been annulled on the ground that she was of unsound mind at the time of that marriage. She was married to the respondent, Bhaire Prasad Srivastava, the second time. The fact of the annulment of the first marriage on the ground that she was an idiot was not disclosed to the bridegroom either by the girl or her parents. It was held that it was not the duty of the bridegroom to find out these facts, but it was the duty of the girl or her parents not to conceal these facts. Consent of the bridegroom was held to have been obtained by fraud, and the second marriage of the appellant with respondent was, therefore, annulled

2. When silence is, in itself, equivalent to speech, such silence is a fraud.

Sometimes keeping silent as to certain facts may be capable of creating an impression as to the existence of a certain situation. In such a case, silence amounts to fraud. A person who keeps silent, knowing that his silence is going to be deceptive, is no less guilty of fraud. Where, for example, the buyer knows more about the value of the property, which is the subject of a sale, but prefers to keep the information from the seller, the latter may void the sale.

Half-truths: Even when a person is under no duty to disclose a fact, he may become guilty of fraud by non-disclosure if he voluntarily discloses something and then stops half the way. A person may keep silence, but if he speaks, a duty arises to disclose the whole truth.

Effect of fraud: A contract, consent to which is obtained by fraud, is voidable. The innocent party has the option to rescind the contract or to affirm it and insist that he be put in the position in which he would have been if the representations were true. After rescission, he is liable to restore the benefit received by him. He can claim rescission, or damages, or both in a suit even if restiutio in integrum is not possible.

Thus, Fraud requires that:

(i) There is a suggestion as to a fact;

(ii) The fact suggested is not true;

(iii) The suggestion has been made by a person who does not believe it to be true; and

(iv) The suggestion has been made with intent either to deceive or to induce the other party to enter into the contract.

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Law of Contract Mains Questions Series: Important Questions for Judiciary, APO & University Exams

1. Law of Contract Mains Questions Series Part-I
2. Law of Contract Mains Questions Series Part-II
3. Law of Contract Mains Questions Series Part-III
4. Law of Contract Mains Questions Series Part-IV
5. Law of Contract Mains Questions Series Part-V
6. Law of Contract Mains Questions Series Part-VI
7. Law of Contract Mains Questions Series Part-VII
8. Law of Contract Mains Questions Series Part-VIII
9. Law of Contract Mains Questions Series Part-IX
10. Law of Contract Mains Questions Series Part-X