This article has been written by Ria Verma, at Symbiosis Law School, NOIDA. This article aims to give an overview of when the silence of one party can be construed as a fraud and how the fraudulent intent of the party can be proved despite their silence.
Table of Contents
Introduction
Fraud is responsible for causing the loss of billions from society. Whether it be getting charged extra while traveling to a particular destination on a cab or a sharp decrease in the value of the shares of a company due to active concealment, white-collar crimes are on a rise.
Broadly speaking, fraud is a deception made intentionally with the objective of damaging another individual/entity or for personal gain. A famous saying is Fraus Omnia Vitiate, that is, fraud vitiates everything.
It is interesting to note that the silence of a party to a contract can also amount to fraud, depending on the particular situation or event.
For example, a vendor sells a defective product to a consumer without informing them of the defects of the product. In this case, failure to mention the defects is the same as a statement that the product does not have any defects.
What is a fraud
As stated in Section 17 of the Indian Contract Act,1872 fraud refers to an act that has been committed by a party or his agent, to a contract with the intent to deceive or induce the other party.
This could be in the form of misappropriation of assets, insurance fraud, money laundering, theft or infringement by a third party, etc. There must be an intentional deception of the item’s condition and genuine monetary damages suffered by a party to the contract.
Fraud refers to the intentional perversion of truth in order to induce another individual to forgo a legal right or part with something that has value in the eyes of law. Swindling individuals of cash is considered to be one of the most widely recognized kinds of misrepresentation, yet there have been numerous false “disclosures” in archaeology, art, science, and various other fields.
Common corporate frauds include the Satyam scam, the Harshad Mehta case, and the Sahara case. These scams made it critical for lawmakers to evaluate the prevailing standards and implement stringent methods to address such frauds.
Could silence be fraudulent
Mere silence usually does not support a fraudulent action. However, when silence is taken together with the circumstances of a particular case, it may amount to misrepresentation. While courts are willing to engage with various factual circumstances to ensure that parties’ intentions are upheld, prudence is always key to reducing the commercial risks and potential litigation in the formulation of contracts.
Mere silence or nondisclosure of facts would not constitute a wrongful act unless the defendant is under an obligation to talk and conceal the facts of a particular transaction or trade. Therefore, mere silence amounts to fraud when the circumstances of the case are such that the individual has a duty to speak and inform the other party of the facts, but they remain silent or the party’s silence is equivalent to expression. The other party to the contract is misled and suffers damages as a consequence.
Section 19 explains the voidability of contracts in the absence of free consent. The first exception of this section explains that if a party gave consent to the terms of the contract by silence or by misrepresentation, the contract would not be voidable if the party could have discovered the truth by ordinary diligence. Here, the silence or the misrepresentation must fall under the ambit of fraud as mentioned under Section 17.
In what circumstances will non-disclosure amount to an actionable misrepresentation
There are many situations wherein the silence, that is, the non-disclosure of information is considered to be critical to the contract and the act of withholding or not offering the material facts amounts to misrepresentation. The more genuine the defect, the more it is covered up, and the more harmful it is to the individual – the more likely the courts will consider the party’s silence as fraud.
1. Duty to disclose facts
The first such case when silence can be held accountable for fraud is when there is a duty by the other party to disclose facts about a particular case. This duty to speak arises where one party makes an offer and the other party accepts. It also arises when one of the parties does not have the intellect or the resources to discover the truth and is dependent on the honesty of the other parties involved.
A contract where such duty arises is uberrima fides, that is, a contract made in good faith. An example would be a contract of insurance, wherein it is the duty of the insured to inform the insurance agent of all the relevant facts to the risk that is being covered. There must be complete good faith on the part of the assured. The insured has a duty to disclose all the relevant facts to the insurer so that he can take into account whether the proposal should be accepted or not.
In P. Sarojam v. L.I.C of India (1985), it was held that when wrong answers are given in a life insurance policy, the policy would be voidable irrespective of the fact that the officer of the corporation certified the policy. In Rajesh Kumar Choudhary v. United India Insurance Co. Ltd, (2005), the party did not disclose that they applied for insurance for their property on similar grounds but had been rejected by the same company. This non-disclosure was held as a suppression of a material fact.
The burden of proof lies on the insurer and they need to show that facts were suppressed by the insured, and that they were of material nature to the risk that was to be covered. They also need to prove that the insured concealed the facts with the intention of misrepresenting the risk undertaken by the insurer.
Some instances where mere silence amounts to fraud are as follows:
Contract of immovable property
Under Section 55(i)(a) of the Transfer of Property Act, 1882, the seller is under an obligation to reveal to the buyer any material defect or shortcoming in the property or in the seller’s title of which the seller is aware. It must be highlighted that the buyer is not aware of that particular defect and cannot foresee or disclose it as a reasonable person.
Contract of marriage
Each party to a contract of marriage is bound by a duty to disclose every material fact. If the accurate facts are not revealed, the other party can break off the engagement and revoke the contract. In the case of Anurag Anand v. Sunita Anand (1996), it was held that caste, income, age, nationality, religion, educational qualifications, marital status, family status, financial status, would be considered as material facts and circumstances.
Therefore, when the consent of one party to the marriage is obtained fraudulently by concealing a material fact concerning the other party, this is voidable at the option of the first party. A decree of nullity can be obtained to annul the marriage. This is in accordance with Section 12 (i)(c) of the Hindu Marriage Act, 1955 and Section 25 of the Special Marriage Act, 1954.
2. When silence is deceiving
Silence itself in some situations can be considered equivalent to speech. Herein, a person who remains silent despite knowing that his silence can be deceptive is not innocent and can be declared guilty of fraud. For example, the buyer knows the property’s actual worth but conceals this fact from the seller. The seller has the option to rescind the sale as it is void.
Another example would be: Mr. A has full knowledge of the fact that an insolvent decree is fully secured. He suppresses this fact and convinces the Official Assignee to assign it at 10 percent of its face value to him. Here, Mr. A makes the representation that the decree is unrealizable. He does not have a duty to disclose that the security is fully secured. However, he makes a false statement that the decree is practically unrealizable with the intention to deceive the assignee. Therefore, his silence would amount to fraud.
3. Change of circumstances
Some of the time a portrayal is genuine when made, yet, it might, on account of a difference in conditions, become bogus when it is followed upon by the other party. In such conditions, it is the obligation of the individual who made the portrayal to convey the difference in conditions. In an English case, a clinical specialist spoke to the offended party that his training was worth £2000 per year. At the time the statement was made, he had stated the correct value of the practice. However, five months later when the plaintiff purchased the training, it was almost worthless. It was held that the failure to communicate the difference in conditions amounted to an actionable misrepresentation.
Similarly, in T.S. Rajagopala Iyer v. South Indian Rubber Works Ltd (1942), a company’s prospectus showed that certain individuals would be the company’s directors. However, before the allotment, some directors had retired and there were changes in the directorate. The Madras High Court held that the non-communication of the change in the directorate was enough for an allottee to avoid the allotment.
4. Half-truths
In any event, when an individual is under no obligation to unveil reality, he may turn into blameworthy misrepresentation by non-divulgence if he intentionally reveals something and at that point stops a large portion of the way. An individual may keep quiet, yet on the off chance that he talks, an obligation emerges to unveil every bit of relevant information.
In R.C.Thakkar v. Bombay Housing Board (1972), incorrect estimates were given in a tender. The contractor, in the belief that the estimate was correct, reduced the costs. The court held that the representations made in the tender amounted to misrepresentation. The defendants could not take the defense that the plaintiff could have deduced the actual costs by reasonable efforts.
5. Guarantee obtained by keeping silence to material circumstances
Section 143 of the Indian Contract Act, 1872 invalidates a guarantee obtained by willful silence as distinguished from mere non-disclosure. The creditor had the duty to give the surety precise and accurate information of all the relevant material facts.
Under this Section, it must be proved that not only was silence observed to material circumstances but the guarantee was also obtained because of the same.
For example, an employer guarantees that the servant is honest and hardworking. However, he concealed the fact that the servant is also employed elsewhere and is guilty of acts such as dishonesty. Here, the past conduct of a servant is a material fact and should be disclosed to the other employer. The case of London General Omnibus Co v. Holloway (1912) had similar facts and the Court held that an omission to mention such facts would imply that such facts do not exist. Therefore, it can be noted that this contract which has been induced by non-concealment of material facts is invalid.
Proving fraudulent intent
An important question here is how can we prove that the contracting party remained silent and did not disclose the relevant material facts? The party who has suffered damages must show that:
- The defendant did not disclose material facts pertaining to the subject matter of the contract.
- The defendant had full knowledge of the facts.
- The defendant’s failure to disclose the facts led to a false impression in the plaintiff’s mind.
- The defendant had the knowledge that his failure to disclose the material facts would cause a false impression and the plaintiff would rely on the false impression.
- The plaintiff relied on the impression and suffered damages as a consequence.
Proving defendants’ intention of deceiving the plaintiff
The defendant’s intent can be proved by obtaining the relevant documents from the possession of the defendant. After the fraud, the plaintiff must consider the following to prove his claim:
1. Hold order
The defendant has to be immediately notified of the duty imposed on him to preserve all the relevant documents about the case, particularly all the information which has been stored electronically. This electronic data could be in the forms of texts and conversations which have been shared with the plaintiff.
2. Document collection
The written documents in possession of the defendant must be collected. The plaintiff relying on these documents must show that the defendant concealed information and committed fraud.
3. Buzz words
There must be a search for words such as “let’s discuss” while reviewing the defendant’s documents which can indicate fraud. An effort to conceal can also be implied by messages requesting the plaintiff to discuss over the phone. Words that raise ethical questions, jokes about misconduct, and hostility can also suggest fraud.
4. Third-party subpoenas
Subpoenas must be used liberally to ensure the disclosure of a complete record in the form of audit work papers, bank statements, and the defendant’s communication with supplies, lenders, and other relevant counterparties. These would help in ascertaining the contradicting statements that were presented to the plaintiff.
If the court is willing to ‘inspect’ evidence that signifies non-disclosure, mere silence is sufficient to prove that fraud has been committed.
Remedies
In case of a silent fraud, the plaintiff has the following two remedies:
- The plaintiff can rescind, that is, cancel the contract and obtain compensation for the losses he has suffered.
- Affirm the contract and sue the defendant to receive damages. (for example, when the value of the asset has decreased)
Depending upon the facts and circumstances of the case, the malicious or criminal intent of the defendant can be proved. Criminal charges can be then brought against the defendant which can result in consequences like criminal fines or even a jail sentence for the defendant.
Damages
In Dambarudhar Behera v. State of Orissa (1980), the plaintiff rescinded the contract due to misrepresentation of facts by the other party. The plaintiff claimed damages as the expenditure occurred in the formulation of the contract and the loss of earnings till the time the plaintiff got to know about the misrepresentation. The Court awarded damages to him and held that the damages given for fraudulent misrepresentation should not surpass the losses which would have occurred had the facts not been misrepresented.
In Smith New Court Securities Ltd v. Scrimgeour Vickers (Asset Management) Ltd (1996), Lord Browne-Wilkinson formulated certain principles to assess adequate damages for fraudulent misrepresentation:
- The defendant is bound to make amends for all the damage directly flowing from the transaction or the contract.
- The defendant must make amends for all the foreseeable damages caused emanating from the contract or by the transactional.
- The plaintiff is entitled to recover by way of damages the full price paid by him, but he must give credit for any benefits which he has received as a result of the transaction.
- As a general rule, the benefits received by the plaintiff would include the market value of the property acquired at the date of the transaction. But this rule is not to be inflexibly applied when applying the rule would obstruct the plaintiff from recovering compensation for the damage he suffered.
- The plaintiff is entitled to recover consequential losses caused by the transaction or the contract.
The plaintiff must have taken all the reasonable steps to mitigate the loss once he has discovered the fraud.
Punishment
The punishment for committing fraud is non-compoundable as the punishment is both fine and imprisonment. With the advancements in technology, online frauds have increased, and subsequently, committing fraud has become a grave offense in the eyes of law.
Section 447 of the Companies Act, 2013 provides punishment for fraud. About 20 Sections of the Act have been dedicated to elucidating the frauds committed by the directors of an organization/entity, auditors, key managerial personnel, and/or the officers of the company. The Act goes beyond ascertaining professional liability and expands it to personal liability if a company is found to contravene any of the provisions of the said Act.
Under Section 447, if an individual is found guilty of fraud he can be punished with imprisonment ranging from 6 months to 10 years. He shall also be liable to fines ranging from the amount involved to three times the amount involved in the fraud. In case the circumstances of the fraud are against the interest of the public, the wrongdoer can be punished with imprisonment for a minimum period of three years.
Section 7(5) states that any individual who suppresses material information or furnishes false information or incorrect particulars he is aware of, in the documents filed with the Registrar for the purposes of registering the company, he shall be subject to punishment under Section 447.
Conclusion
Hence, mere silence to certain material facts affecting the wish of an individual to enter into the contract would not amount to fraud. But if their silence can be treated as speech or the individual has a duty to inform the other party of the facts, silence would amount to fraud. Mere silence can result in fraud because of non-disclosure of relevant facts by one party causing damages to the other party.
A desperate financial need may be the cause of frauds prevalent all across the globe. Punishment for fraud is quite minimal and should be replaced with a harsh penalty to instill a moral conscience on the citizens to not be swayed by the rewards of fraud. The public must be aware of prevalent scams and must verify whether the information provided by the party is credible or not. Elimination of fraud is not an instantaneous event but society as a whole has to pay the price.
References
- Avtar Singh, Contract and Specific Relief, 12th Ed (2020)
- Pollock and Mulla, The Indian Contract Act,1872, 15th ed (2017)
- https://www.gtlaw.com/-/media/files/insights/published-articles/2019/06/common-law-fraudulent-and-negligent-misrepresentation.pdf
- https://www.mondaq.com/india/white-collar-crime-anti-corruption-fraud/696380/corporate-frauds-an-analysis
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