Fraud | 'A' man by the name of N called at a jeweller’s shop and chose a costly ring… He took the ring and pledged it to B, who had no notice of the fraud. Can the jeweller recover the ring from B?

Question: Fraud | ‘A’ man by the name of ‘N’ called at a jeweller’s shop and chose a costly ring. He tendered payment through a cheque which he signed in the name of a person of credit. He took the ring and pledged it to ‘B’, who had no notice of the fraud. Can the jeweller recover the ring from B? [Punjab JS 2006]

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Answer

One of the essential ingredients, in order to constitute a valid contract, is that the consent of the parties should be absolutely free.

Section 14 of The Indian Contract Act, 1872 talks about what is free consent. According to the provision, consent is said to be freely given when it would not have been given but for the existence of such coercion, undue influence, fraud, misrepresentation, or mistake.

Section 17 of the Act lays down provisions as to what all constitutes fraud. It says, “Fraud means and includes any of the following acts committed by a party to contract or with his connivance or by his agent with the intent to deceive other parties 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, made by a person 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 specifically declares to be fraudulent.”

Effect of Fraud

A contract, consent to which is obtained by fraud, is voidable under Section 19. The party deceived has the option to affirm the contract and insist that he be put in the position in which he would have been if the representations were true, or he may rescind the contract to the extent it is not performed. Upon rescission, he is liable to restore the benefit received by him under Section 64 and may recover damages. The measure of damages recoverable is essentially that applicable to the tort of deceit, i.e., all the actual loss directly flowing from the transaction induced by the fraud, including the heads of consequential loss, and not merely the loss which was reasonably foreseeable. For example, where a document, which was intended to be in favour of a particular person but, was as a result of fraud of defendant, conveyed to someone else, the transaction would be also voidable under Section 19.

In the present case at hand where ‘A’ man by the name of ‘N’ called at a jeweller’s shop and chose a costly ring. He tendered payment through a cheque which he signed in the name of a person of credit. He took the ring and pledged it to ‘B’, who had no notice of the fraud. Here, Jeweller believed 'A’ to be'N’ let him take away the diamond ring under the mistake of identity because fraud was played by ‘A’ on the jeweller. So consent of the jeweller was caused by fraud and thus the contract was voidable.

Similar facts are of the leading case of Phillips v. Brook Ltd. (1919) 2 K.B. 243 in which Horridge J. held that agreement was not void on the ground of mistake in so far as plaintiff contracted to sell and deliver the ring to a person who was present in the shop. The contract was only voidable on the ground of fraud. It was observed:

“The minds of the parties met and agreed upon all the terms of the sale, the thing sold, the price and time of payment, the person selling and the person buying. The fact that seller was induced to sell by the fraud of the buyer made the sale voidable but not void.”

Thus, the contract becomes concluded by only through vitiated consent so the aggrieved party has the option to either rescind the contract or accept it. If the jeweller chooses not to rescind the contract, ‘B’ holds good title over the costly ring because it was pledged to him by ‘A’. Moreover, ‘B’ had no notice of such fraud committed by ‘A’ on the jeweller, and acting in good faith being a pawnee he is entitled to the protection given under Section 178A of the act. Thus, the jeweller can’t recover the ring from ‘B’.

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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