This article has been written by Divyani Newar, student of the Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution course from LawSikho.
This article has been edited by Shashwat Kaushik.
Table of Contents
Introduction
In today’s modern era of development, contract law is essential to every commercial venture. A multitude of contracts, including those involving businesses, are made almost every day. The Indian Contract Act of 1872 is the primary legislation governing India and includes all of the laws dealing with contracts in India.
Section 14 of the Act highlights the concept of free consent in contracts. A legally binding contract must contain the necessary component of free consent. To know if a contract is valid, issues like fraud and misrepresentation demand careful consideration owing to their extensive usage in standard contracts.
What is a valid contract
An agreement must have free consent to be enforceable as a legally binding contract. As per Section 13 of the Indian Contract Act of 1872, two individuals are said to have consented when they reach an agreement with one another over the same matter.
Contracts that fulfil all requirements are deemed valid and can be enforced in a court of law. The parties are legally obligated to perform their part under a legitimate contract. Contracts can be made either orally, in writing, or by the conduct of the parties.
Elements of a valid contract
Contracts form the basis of today’s modern and civilised world. The laws governing contracts in India are subject to the Indian Contract Act, 1872. Section 10 of the Indian Contract Act of 1872 states what constitutes a contract. According to Section 10, a contract is an agreement enforceable by law. It involves the following elements:
- Offer and acceptance: A contract comes into existence when one party (the offeror) makes an offer to another party (the offeree), and the offeree accepts the offer. An offer is a proposal to enter into a legally binding agreement, while acceptance is an unconditional agreement to the terms of the offer.
- Consensus ad idem: There must be a consensus ad idem, or a “meeting of the minds,” between the parties. This means that both parties must have the same understanding of the terms and conditions of the contract. Any misunderstanding or ambiguity can invalidate the contract.
- Consideration: Consideration is the price paid or promised for the promise of another. It can be anything of value, such as money, goods, services, or a promise to do or refrain from doing something. Consideration must be sufficient and legally valuable in order to create a binding contract.
- Legal capacity: The parties to a contract must have the legal capacity to enter into a legally binding agreement. Minors, persons of unsound mind, and persons under the influence of intoxication or drugs may not have the capacity to contract.
- Free consent: The consent of the parties to a contract must be free and voluntary. It cannot be obtained through fraud, misrepresentation, undue influence, coercion, or duress. A contract entered into under duress or undue influence is voidable at the option of the aggrieved party.
- Lawful object: The object of a contract must be lawful. A contract that involves illegal or immoral activities is void and unenforceable.
- Certainty: The terms of a contract must be certain and definite. Vague or ambiguous terms can make a contract void due to uncertainty.
- Possibility of performance: The terms of a contract must be capable of being performed. A contract to do something impossible is void.
- Written or oral: In general, contracts can be either written or oral. However, certain types of contracts, such as those involving the sale of land or goods exceeding a certain value, must be in writing to be enforceable.
- Registration: In some cases, such as when the contract involves the transfer of immovable property, the contract must be registered with the appropriate government authorities to be legally valid.
By fulfilling these essential elements, an agreement becomes a legally enforceable contract under Section 10 of the Indian Contract Act of 1872.
Free consent : an essential element of a valid contract
A meeting and exchange of minds between both parties is needed when two individuals engage in a contract. This implies that both parties must come to an agreement on the same matter in an identical way. When someone voluntarily adopts the suggestion or wish of another, this is referred to as consent.
The parties to a contract must have the same purpose and intent according to the concept of consensus-ad-idem. The parties must be in agreement when it comes to the content covered by the contract.
Section 14 of the Indian Contract Act defines free consent. It states that a consent is said to be free if it does not include elements such as coercion (Section 15), undue influence (Section 16), fraud (Section 17), misrepresentation (Section 18) and mistake (Sections 20, 21 and 22).
Voidable contracts
Section 19 of the Indian Contract Act addresses the voidability of agreements if there is a lack of free consent. If it is found that the contract formed between the parties has any of the elements from Sections 15 to 18 of the Indian Contract Act mentioned above, then the agreement will be considered voidable at the choice of the party whose consent was taken.
Fraud in contracts
Concept of fraud
The Indian Contract Act defines fraud as an act of deliberate deception with the intention of giving the offender an unlawful advantage or gain, or, on the other hand, forfeiting the rights of the victim, which are included in the initial clauses of Section 17 of the Act. Fraud is when a person has an unethical and unlawful gain over the expense of another person, which accounts for an act of deception. The false assertion needs to be a fact, not just a person’s opinion. Fraud cannot exist if there is no loss. The party has to bear some actual loss to claim that fraud has been committed against them.
The regulatory framework dealing with issues of corporate fraud is the Companies Act of 2013, under which fraud is defined under Section 447. As technology has evolved, there has been a rise in online fraud, and in recent times, the law has made fraud a serious offence.
Fraudulent acts can be committed by a single individual, more than one individual, a group of individuals or an entire corporation. The economy faces the consequences of fraud in billions every year and those involved in it, if found guilty, have to compensate by paying a fine and even imprisonment. The Indian Contract Act recognises the seriousness of fraud and provides legal remedies to victims who have suffered losses due to fraudulent practices. It highlights the importance of honesty, transparency, and fair dealing in contractual relationships and sets a legal framework to address and deter fraudulent conduct.
Illustration: A sold his car to B, stating that it was in good condition when he knew it was not. With the intent of deceiving and selling his car by any means, he is guilty of fraud in this case against his buyer.
Components of fraud
- Stating facts without first being certain if they’re true:
Providing a false impression and pressuring a person to take action on it amounts to fraud.
- There should be an active concealment of facts:
Active concealment occurs when one party with a legal obligation withholds essential contractual details from the other
- There should be a promise made without intention of its execution:
It is deemed fraudulent to pledge something that one doesn’t plan to honour.
- Careless and vague statement:
If there is no proof of a genuine and sincere belief, it amounts to fraud, regardless of how carelessly or deliberately the claim was made.
Element of silence
As per the provisions of the Indian Contract Act of 1872, mere silence does not qualify as fraud. However, the interpretation of Section 17 of the Indian Contract Act lays out the conditions under which silence can be interpreted as fraud. The exceptions when silence may amount to fraud are:
- There is a duty to speak: When one party to a contract places faith and confidence in the other, a duty to communicate arises.
- There is a duty to inform about the changes: At times, a statement made by someone may be true, but when the other person acts on it, it may turn out to be false due to a change in circumstances. In these situations, the representative must inform the other party of the change in circumstances.
- Where silence might be misleading: where silence amounts to fraud and the other party has the opportunity to learn about it via reasonable investigation.
- There is half-truth: A person may be found guilty of fraud in situations where they are not required to give information but, by their own free will, reveal something and then stop midway through.
Burden of proof
In the event of alleged fraud being charged, the plaintiff bears the burden of proof. The plaintiff must present the particulars of the case to assert the circumstances that constitute fraud. It takes proof of mens rea to establish fraud. The law raises an acceptable probability of fraud when the parties are not on the same footing. On the other hand, neither party can gain an edge from a transaction in which both parties are in pari delicto.
Legal consequences or remedy
Whenever there is involvement of coercion, fraud, misrepresentation or undue influence in an agreement, it becomes voidable at the discretion of the party whose consent was obtained in such a manner under Section 19 of the Indian Contract Act.
If there was an act of fraud or misrepresentation that resulted in the other party’s assent to the contract, that party may, if appropriate, demand that he be placed in the same situation that he would have found himself in had the assertions been accurate.
Fraud or deception also amounts to a tort that may give rise to compensation in terms of damages. It gives rise to a claim for damages resulting from deception in addition to making a contract voidable at the sole option of the party whose consent is obtained in this manner as per the context of common law.
Fraud under English law
Fraud is defined by UK law as creating a false impression for one’s benefit or to cause loss to someone else. Falsely avoiding delivering material information when one was obligated to. It can also be defined as misusing the position one holds if one has a responsibility to safeguard the financial interests of other individuals and fails to do so to benefit oneself at the expense of another party, causing them to suffer losses.
These are defined in an array of statute law and common law sources, which include provisions from the Theft Act of 1968 and the Fraud Act of 2006. The prosecution must demonstrate that the defendant committed a false portrayal or representation to accuse them of the crime of fraud.
Misrepresentation in contracts
Concept of misrepresentation
Misrepresentation is addressed in Section 18 of the Indian Contract Act of 1872. According to the Indian Contract Act, misrepresentation is the positive declaration of something false but the speaker believes it to be true, which is generally not supported by his knowledge. An act of infringement of duty where the person benefits from the deception, without intending to deceive, by misleading another person into believing a preconceived false belief. Even if the mistake is committed with an innocent intention, making a party to an agreement to commit such a mistake about the very nature of the thing that is the content of that agreement.
In general terms, an inaccurate statement of an essential fact stated by one party that influences the decision of the other party to sign a legally binding agreement or contract is considered a misrepresentation. Making a misleading statement concerning a fact that is pertinent to the contract is referred to as misrepresentation. It is a statement stated before the fulfilment of the contract. Only factual statements are considered misrepresentations, not views or predictions. A person may choose to nullify a contract whose consent was obtained through such deception.
Illustration: A sold the car to B under the false impression that it was in good condition, based purely on his belief and ignorance of the fact that the car was not functioning properly. He is guilty of misrepresentation in this case to his buyer.
Components of misrepresentation
- There is an unauthorised claim: When someone asserts something to be true when it is in reality untrue, it is termed misrepresentation
- There is a violation of duty: Because of the situations involving this sort of misrepresentation, even if the individual making the representation has no intention of deceiving, they are nevertheless liable to the party they have deceived into believing that there has been a fraud.
- There has been an attempt to make a mistake about the subject matter: If a party is provided with incorrect or misleading information about the nature or subject matter of the contract and the party was led to believe that information, it would be considered misrepresentation
Burden of proof
The party making the accusation bears the burden of proof to prove misrepresentation as per the law of contract. This burden is often challenging to discharge, as the accuser must present concrete evidence of false statements, omissions, or distortions of material facts that induced them to enter into the contract.
Legal consequences or remedy
In such a form of contractual conflict, the defendant is the one being accused of misrepresentation and the plaintiff is the one making the accusation.
If the party whose approval was acquired had the means to ascertain the truth with reasonable effort, the contract does not become voidable even if the consent was obtained using misrepresentation or fraudulent silence within the purview of Section 17 of the Contract Act.
In India, Section 19 of the Indian Contract Act provides remedies to the party who is innocent in cases of both fraud and misrepresentation. The affected party is entitled to legal remedies, including termination and damages, in case of infringement of the contract.
As per the Specific Relief Act of 1963, within an acceptable period of time, a party can opt to repudiate or rescind the contract, provided it can be shown that the other party committed a misrepresentation before the execution of the contract. Rescission of a contract is covered under Sections 27 – 30 of the Specific Relief Act.
Misrepresentation under English law
According to English dictionaries concerning the law, misrepresentation is when a party gives the other party a false factual assertion during negotiations of a contract to persuade them to sign the agreement. Therefore, the term misrepresentation describes the situation where the party to the contract was tricked into signing it by another party using a false assertion.
The fact that the law of misrepresentation lies on the edge of the law of contract and the law of tort, as well as unjust enrichment, makes it seem fairly complex. Misrepresentation more effortlessly fits in the area governed by tort law; determining whether a misrepresentation was made carelessly or through a fraudulent act depends on issues that arise more frequently in tort law if any indemnification ought to be given.
In the case of England, the Misrepresentation Act of 1967 regulates negligent as well as innocent misrepresentation, while the common English law governs fraudulent misrepresentation and offers damages in the Tort of Deceit.
Distinction between fraud and misrepresentation
| Fraud | Misrepresentation |
| When there is fraud, the one deceiving purposefully deceives the other party by making a false statement. | In cases of misrepresentation, the person makes a false claim and honestly thinks it to be real. |
| Fraud gives rise to a claim for damages resulting from deception in addition to making a contract voidable at the sole option of the party whose consent is obtained in this manner as per the context of common law. | The repercussions of misrepresentation are mainly confined to remedies under the contract, which include either damages or revocation of the contract and are essentially a matter that falls under civil law. |
| Illustration: If a seller informs a prospective buyer that his apartment is 2000 square feet when, in reality, the seller is well aware that it is in reality 1000 square feet, it amounts to fraud. | Illustration: If the seller represents to a prospective buyer that the flat is 2000 square feet when he believes it is 2000 square feet, it will amount to misrepresentation. |
Provision of indemnity clause in contracts
Contracts of a commercial nature typically contain indemnity clauses. In most cases, an indemnity clause encompasses within it all sorts of damages other than just direct losses.
Section 124 of the Indian Contract Act of 1872 establishes the legal framework for provisions regarding indemnification in India. This section defines an indemnity as a contract in which one party agrees to shield the other party against losses resulting from the promisor’s or third parties’ conduct.
Under the provisions of Section 73 of the Indian Contract Act, indemnity is only applicable in situations where a loss had been expected as a result of an infringement or breach of contract.
Judicial interpretations
Draupadi Poira vs. Bhagabat Chandra Poira (2023)
In this recent case, the Calcutta High Court, comprising Justice Rajasekhar Mantha and Justice Supratim Bhattacharya, emphasised that the appellants/plaintiffs had the burden of proof, and as they were unable to substantiate their claims, the issue of transferring that burden of proof to the defendants or respondents does not even arise.
Avitel Post Studioz Limited and Ors. vs. HSBC PI Holdings (Mauritius) Limited and Ors. (2020)
In this case, the Court decided that only if one of the two requirements was met, it would amount to grave accusations of fraud resulting in the non-arbitrability of the agreement or else it would be deemed arbitrable. These are:
- If the court determines that the arbitration agreement cannot exist because of the act of fraud.
- When accusations of malafide or fraudulent conduct are brought against the state or its agencies, they raise issues of law governing the public rather than those confined to the contractual arrangements binding the parties.
Noorudeen and Ors. vs. Umairathu Beevi and Ors. (1998)
In this case, it was held by the Court that it was a case of fraud and misrepresentation where the defendant executed a sale deed of the plaintiff’s property by deceiving the plaintiff that it was a hypothecation deed. The plaintiff, a blind man, was misrepresented by his son, who tried to sell the property for inadequate consideration and the deed executed was considered invalid and set aside. The Court highlighted several key factors that supported its finding of fraud. Firstly, it noted that the plaintiff was a vulnerable individual due to his visual impairment, which made him susceptible to exploitation and manipulation. Secondly, the Court pointed out that the defendant, being the plaintiff’s son, held a position of trust and confidence, which he breached by deceiving his father.
The misrepresentation aspect of the case centred around the false representation made by the defendant that the document being executed was a hypothecation deed, which is a type of mortgage where the property is pledged as security for a loan. However, the actual document signed by the plaintiff was a sale deed, which transferred the ownership of the property to the defendant. The Court held that this misrepresentation was material and induced the plaintiff to execute the document, resulting in his loss of property.
The Court’s decision in this case upheld the principles of fairness and justice, ensuring that vulnerable individuals are protected from unscrupulous acts of fraud and misrepresentation. It emphasised the importance of transparency and informed consent in property transactions and cautioned against any attempt to exploit vulnerable individuals for personal gain. This judgement serves as a reminder to all parties involved in property transactions to act with honesty and integrity, respecting the rights and interests of others.
Shri Krishnan vs. the Kurukshetra University, Kurukshetra (1975)
The concept of fraud involves the intentional deception of another person for personal gain or advantage. To prove fraud, several elements must be established, including a false representation of a material fact, knowledge of the falsity of the representation, intent to deceive, reliance on the representation, and damages suffered as a result of the reliance.
In this particular case, the court determined that the victim of the alleged fraud could have discovered the truth through due diligence. This means that the victim had the opportunity and means to investigate the matter and uncover the deception. The court considered the fact that the institution was responsible for carefully examining the forms and concluded that the victim should have relied on the institution’s review process rather than blindly accepting the representations made.
Furthermore, the court found that neither suggestio falsi nor suppressio veri were present in this case. Suggestio falsi refers to making a false statement, while suppressio veri refers to concealing or omitting a material fact. The court concluded that there was no evidence to suggest that the institution made any false statements or intentionally concealed any relevant information.
The decision in this case highlights the importance of due diligence in preventing fraud. Individuals and organisations must exercise reasonable care and caution when relying on representations made by others, especially in matters involving financial transactions or legal agreements. By conducting thorough due diligence, potential victims of fraud can protect themselves from being deceived and suffering financial or legal consequences.
Conclusion
It is imperative that one enter into a contract willingly and free from coercion. The Indian Contract Act defines fraud as when someone makes a promise they have no intention of keeping or hides a fact they are aware of or believe to be true. Misrepresentation serves as the foundation for breach of contract in all kinds of transactions, regardless of size. It is limited to factual statements, not views or predictions. The purpose of these, along with other provisions in the Contract Act, is to protect the best interests of the parties entering into the contract.
References
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- https://www.lawyersclubindia.com/judiciary/does-hiding-of-information-means-fraud-if-the-other-party-can-acquire-the-information-on-its-own-and-has-time-to-acquire-it–4328.asp
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