This article has been written by Diva Rai and Ria Verma, students of Symbiosis Law School, Noida. In this article she discusses Section 17 of the Indian Contract Act, which defines fraud in contracts.
Definition of Fraud
Fraud implies and involves any of the following acts committed by a contracting party or his connivance or his agent with the intention of deceiving or inciting another party or his agent to enter into the agreement.
- The suggestion, as a fact, of that which is not true by one who does not believe it to be true.
- The active concealment of a fact by one having knowledge or belief of the fact.
- A promise made without any intention of performing it.
- Any other act fitted to deceive.
- Any such act or omission as the law specially declares to be fraudulent.
Mere silence as to facts likely to affect the willingness of a person to enter into a contract is not fraud, unless the circumstance of the case is such that, regard being had to them, it is the duty of the person keeping silence to speak, or unless his silence, in itself is, equivalent to speech. Illustration– A sells by auction to B a horse, which A knows to be unsound, A says nothing to B about the horse’s unsoundness. This is not fraud in A.
Section 17 describes fraud and lists the acts that amount to fraud, which are a false claim, active concealment, promise without the intention of carrying it out, any other deceptive act, or any act declared fraudulent. To constitute fraud, the contracting party, or any other individual with his connivance, or his agent, or to induce him to enter into the agreement, should have performed such acts. The parties have no duty to speak about facts likely to affect the consent of the other party to the contract, and mere silence does not amount to fraud unless the circumstance of the case shows that there is a duty to speak or silence equivalent to speech.
Fraud and Misrepresentation
The main difference between fraud and misrepresentation is that in the first case the person making the suggestion does not believe it is true and in the other case he believes it is true, although in both cases it is a misrepresentation of fact that misleads the promisee. This was held in Rattan Lal Ahluwalia v Jai Janider Parshad. Under common law, fraud will not only render the contract voidable at the option of the party whose consent is so obtained but will also give rise to an action for damages in respect of deceit.
If a decree is found to have been obtained by fraud, an application moved, even belatedly, would be maintainable. The court has inherent jurisdiction to grant relief on such an application and even principles or res judicata would not apply. Fraud is a conduct either by letter or words, which includes the other person or authority to take a definite determinative stand as a response to the conduct of the former either by words or letter. Indeed, innocent misrepresentation may also give reason to claim relief against fraud.
Ingredients of Section 17
When analysed s 17(1) shows the following ingredients:
- There should be a suggestion as to a fact;
- The fact suggested should not be true;
- The suggestion should have been made by a person who does not believe it to be true; and
- The suggestion should be made with intent either to deceive or to induce the other party to enter into the contract.
Representation
A representation is a statement of fact, past or present and is distinct from an opinion statement, although a statement of opinion may be considered as a statement of fact in certain circumstances. The fraudulent misrepresentation must be material in order to allow the representative to prevent the agreement, i.e. such that it would have affected a reasonable man in choosing whether to enter into the agreement or not. In Lillykutty v Scrutiny Committee, a false certificate was obtained in order to take unfair advantage. It was held that fraud vitiates every solemn act. Fraudulent acts are not encouraged by the courts. Any action by the authorities or by the people claiming a right/privilege under the Constitution of India which subverts the constitutional purpose must be treated as a fraud on the Constitution.
False Assertion without Belief in its Truth
To prove a case of fraud, it must be proved that representations made were false to the knowledge of the party making them. The statement must be false in substance and in fact. Positive knowledge of falsehood is not a criterion. In order to constitute fraud, it is necessary that the statement was made by the person concerned with knowledge of its falsehood, or without belief in its truth. Even mere ignorance as to the truth or falsehood of material assertion, which, however, turns out to be untrue, is deemed equivalent to the knowledge of its untruth, as also where the representor suspected that his statement might be inaccurate, or that he neglected to inquire into its accuracy. In Jewson & Sons Ltd v Arcos Ltd, giving a false impression and inducing a person to act upon it, was considered fraud, even if each fact taken by itself would be literally true.
Reckless Statements
Proof of absence of actual and honest belief is all that is necessary to satisfy the existence of fraud, whether the representation is made recklessly or deliberately; indifference or recklessness on the part of the representor as to truth or falsity of the representation affords merely an instance of absence of such belief. Statements made without belief in the truth would include statements made recklessly. Misrepresentation as to title made by vendors recklessly or with gross negligence cannot escape the charge of fraudulent misrepresentation.
Ambiguous Statements
Where the representer makes an ambiguous statement, the person to whom it is made must prove that he understood that statement in the sense that it was in fact false. The representor will be guilty of fraud if he intended the statement to be understood in that sense, and not if he honestly believes it to be true, but the person relying on it understands it in a different sense. Once it is held that the representation was fraudulent under this clause, the exception in s 19 is of no avail, and the question whether the person alleging fraud had or had not the means of discovering the truth with ordinary diligence, is immaterial.
Active Concealment
Mere non-disclosure of some immaterial fact s would not per se five a right to recission unless it is further found that the consent has been secured by practicing some deception. Where the seller sold property already sold by him to a third person, his conduct amounted to active concealment and fraud, and the buyer could recover the price despite the agreement that the seller could not be responsible for a defect in title.
Promise without Intention of performing it
Making a promise without the intention of performing it is fraud, though not so under the English law. To bring the case within this clause, 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 this purpose.
Silence as Fraud
Silence about fats is not fraud per se. Unless there is a obligation to talk or if it is equal to expression, mere silence is not fraud. This rule has two skills. First, suppressing portion of the known facts may mislead the assertion of the remainder, although literally true as far as it goes. In such a case, the declaration is substantially incorrect, and fraudulent is the willing rejection that makes it so. Secondly, commercial use may impose a obligation to disclose specific flaws in products sold or the like. In such a situation, failure to mention such a defect is equal to an statement that there is no such defect.
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.
Duty to Speak
There is no general duty to disclose facts that are or might be equally within the means of knowledge of both parties. In Bell v Lever Bros, the company agreed to pay large compensation to two employees, the subsidiary company directors, whose services were being dispensed with. After paying the money, the company discovered that the directors had committed breaches of duty, which would have justified their dismissal without compensation. The House of Lords held that the directors had not these breaches in mind, and were under no duty to disclose them.
No Fraud
If the party alleging fraud had the facts before it or had the means to know them, it could not be said to have been defrauded, even if a false statement has been made. Further, a contract cannot be merely on a trivial and inconsequential mis-statement or non-disclosure. In Janakiamma v Raveendra Menon, where the plaintiff was aware of the contents of the Will of her father, the partition of property on the death of the father and mother was not set aside on the ground of fraud of not disclosing the contents of the Will; and no fresh partition was ordered.
Evidence and Burden of Proof
In a great majority of cases, fraud is not capable of being established by positive and tangible proof. It is by its very nature secret in its movements. It is, therefore sufficient if the evidence given is such as ay lead to interference that fraud must have been committed. In most cases, circumstantial evidence is the only resource in dealing with questions of fraud. If this were not allowed, the ends of justice would be constantly, if not invariably, defeated. At the same time, the interference of fraud is to be drawn only upon an intentional wrongdoer. Being a restitutionary remedy, all actual losses flowing from fraud are recoverable, even if they could not have been reasonably foreseen; subject to the rule of mitigation by the defrauded party. Nor would the damages be reduced on account of contributory negligence.
Effect of Fraud
A contract, consent to which is obtained by fraud, is voidable under s 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 s 64 and may recover damages. The measure of damages recoverable is essentially that applicable to the tort deceit, ie, all the actual loss directly flowing from the transaction included by the fraud, including the heads of consequential loss, and not merely the loss which was reasonably foreseeable. Where a document, which was intended to be in favor of a particular person but, as a result of fraud of the defendant, conveyed to someone else, the transaction would be also voidable under s 19.
Damages for Fraud
Where a contract is induced by fraud, the representee is entitled to claim rescission, or damages or both. He would have a remedy by way of such suit, even if restitutio in integrum is not possible as in Indranath Banerjee v Rooke. In Firbank’s Executors v Humphreys, the damages for fraudulent misrepresentation, under the general rule, were arrived at by considering the difference in the position the plaintiff would have been in, had the representation been true and in the position he is actually in, in consequence of it’s being true.
The principles applicable in asserting damages for fraudulent misrepresentation have been stated by Lord Browne-Wilkinson in Smith New Court Ltd v Scrimgeour Vickers (Asset Management) Ltd:
- The defendant is bound to make reparation for all the damage directly flowing from the transaction;
- Although such damage not have been foreseeable it must have been directly caused by the transaction;
- In assessing search damage, the plaintiff is entitled to recover by way of damages the full prize faced 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 him into the market value of the property acquired at the date of the transaction, but the general rule is not to be inflexible applied where to do so would prevent him from obtaining full compensation for the wrong suffered;
- The plaintiff is entitled to recover consequential losses caused by the transaction;
- The plaintiff must take all reasonable steps to mitigate the loss once he has discovered the fraud.
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)
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