By Asok Nadhani
5.6 Fraud
a.
Intention
to deceive : As per Sec. 17, Fraud means
and includes any of the following acts committed by a party to a contract, or
with his connivance, or by his agents, with intent to deceive another party
thereto or his agent, or to induce him to enter into the contract.
i.
Suggestion
of untrue fact : the
suggestion of a fact, which is not true, or believe it to be not true;
Ex. Y with an intension to deceive X falsely
represented 100 quintals of cotton balls in his godown, there by inducing X to
buy the godown. The contract is voidable at the option of B.
ii.
Active
concealment : the active
concealment of a fact by one having knowledge or belief of the fact;
Ex. Ram while working on the field of Rahim discovered
some hidden jewellery and concealed the fact. Later on he managed to purchase
the field from Rahim. This contract is voidable at the option of Ram.
iii.
No
intention to perform : a
promise made without any intention of performing it;
iv.
Act
to deceive : any other act
fitted to deceive;
v.
Fraudulent : any such act or omission as the law
specially declares to be fraudulent.
b.
The
following acts amounts to fraud:
i.
False
statement made recklessly :
A false statement made knowingly or without belief to be true, recklessly or
not caring whether it is true or not, with an intention to make other person
act upon it.
ii.
Material
fact concealed : A
material fact has been concealed or fact has been partially stated so as to
make it false.
5.6.1 Elements of Fraud
i. False
representation : There must be a false representation or assertion. If
the representation is true when it is made, but become untrue to the knowledge
of the party making it, then it must be corrected, otherwise the other Party
can rescind it.
Ex.
C make an untrue statement to D with the intention of inducing D
to enter into a contract with him, this amounts to Fraud.
Ex.
C offers to sell to D a painting as original work, which only C knows is
a good copy of a well-known masterpiece. D agrees to buy thinking it
original. Held, D may rescind the
contract.
ii. Material
fact
: The representation must relate to a material fact (which existed in the past
or exists now). A mere opinion, commentary or statement is not regarded as representation
of fact.
Ex. X while
negotiating with Y for the sale of certain goods, tells him that the goods cost
him Rs.5000. This is a statement of fact. But if he states that the goods are
worth Rs.5000, this is a statement of opinion.
iii. Intent to
induce
: The representation must have been made before the conclusion of the contract,
with an intention to induce other party to act on it.
iv. Reckless
Act
: The person making the representation knows it to be false or makes it
recklessly not caring whether it is false or true. It must have been by the
party or by its connivance or its agent.
v. Other
party induced : The other party must have been induced to act upon the
representation.
Ex.
A, a businessman, truly represented to B, a prospective buyer, that his business
turnover was Rs.20 Lakhs a year. Five months later when B bought the business,
it had considerably gone down on account of A’s serious illness. A did not
disclose this fact to B. B may avoid the contract as A ought to have disclosed
the fact.
vi. Party deceived : The
other party must have relied upon the representation and was deceived. A mere
attempt to deceive is not fraud unless the party was actually deceived.
Ex. S brought
an electric oven from P. The oven was defective but P had fixed it up, S did not
check the woven and started using it. The oven was completely destroyed. Held, the oven was destroyed due to other cause
and not for the problem which has been already fixed up by P, so S is liable to
pay for the oven.
vii. Damage : The
other party acting upon the representation must have suffered loss. There is no
fraud without damage.
viii. Committed by a party to the contract : It must have been committed by a party to the contract or
anyone with the connivance of a party to the contract.
ix. Knowledge
of its falsity : The fraudulent act must be committed with knowledge of
its falsity.
5.6.2 Non Disclosure of Fact amounting to
Fraud
a.
Need
not disclose all material facts : A party while entering into a contract need not disclose all
material facts, but he should not actively conceal a fact.
Ex.
Two traders A and B enter into a contract. A has private information of a
change in prices which would affect B’s willingness to proceed with the
contract, but he did not disclose. It will not affect the contract. Because, it
is not essential for A to disclose the private information.
b.
However,
there are statutory exceptions to the fact:
i.
Duty
to speak : Having regards
to the circumstances, it is the duty of the person (who remained silent) to
speak out the fact.
ii.
Latent
known defects : Where the
seller fails to disclose the buyer of a latent known defect (not apparent in
ordinary inspection) in the product being sold.
iii.
Disclosure
by Trustee : A Trustee
does not make full disclosure of facts to the beneficiary while entering
contract with him, his silence about any materials fact amounts to fraud.
iv.
Partial
disclosure : Where partial
disclosure deceives the other party.
Ex.
A, a businessman, truly represented to B, a prospective buyer, that his
business turnover was Rs.20 Lakhs a year. Five months later when B bought the
business, it had considerably gone down on account of A’s serious illness. A
did not disclose this fact to B. B may avoid the contract as A ought to
have disclosed the fact.
c.
Silence : Mere silence to affect the willingness
of a person to enter into a contract is not fraud, unless his silence is, in
itself, equivalent to speech.
Ex. P is Q’s
son. P says to Q that ‘If you don’t deny it, I shall assume it that the horse
is sound’ Q says nothing. Here the
relation between parties would make it Q’s duty to tell P if the horse is
unsound, so Q’s silence is equivalent to speech.
Ex.
A, a businessman, truly represented to B, a prospective buyer, that his
business turnover was Rs.20 Lakhs a year. Five months later when B bought the business,
it had considerably gone down on account of A’s serious illness. A did not
disclose this fact to B. B may avoid the contract as A ought to have
disclosed the fact.
5.6.3 Legal consequences of
Fraud
a. Voidable : A
contract induced by fraud is voidable at the option of the party defrauded. The
contract remains valid until it is avoided.
b. The
aggrieved party may:
i. Rescind : Rescind
the contract within a reasonable time.
ii. Insist on
performance : He can insist on performance of the contract on the
position he would have been, had the representation been true.
Ex.
A woman fraudulently represented to a firm of jewellers that she was the wife
of a certain baron and thus obtained two pearl necklaces on credit on some
pretext with a view to buying them. She sold those necklaces to X. a third
person. Held, X must restore the necklaces to jeweler.
iii. Sue for
damages
: The Party whose consent was obtained by fraud may sue for damages.
c.
Loss
of right : However, the
aggrieved party loses his right to avoid/ rescind the contract:
i.
Where
the aggrieved party could discover the truth by ordinary diligence, as a
prudent man would take in his own case.
ii.
Where
the party enters into the contract in ignorance of the fraud.
iii.
Where
the party affirms the contract after becoming aware of fraud.
iv.
Before
the contract is avoided, a third party acquires the right in the subject matter
for value, acting bona fide.
v.
When
a party to a contract whose consent was not freely obtained, cannot be put in
the position he would have been had the represented fact been true.
vi.
A
Fraud which did not cause the consent of the party to the agreement.
vii. Where interests of third parties intervene,
before the contract is avoided.
viii. Where the truth though not known to the
principal was known to his agent.
d.
Restoration
of Benefits : When a party
rescinds a voidable contract, he shall restore (i.e., pay back) any benefit
received by him under such contract, to the person from whom the benefit was
received (sec. 64).
5.6.4 Distinction between Fraud and
Misrepresentation
i.
In
misrepresentation, there is no intention to deceive. In fraud,
the intention is to deceive.
ii.
In
misrepresentation, the party making the statement believes it to be
true, while in fraud, he believes it to be untrue.
iii.
In
misrepresentation, the aggrieved party may rescind the contract or
insist for restitution (there cannot be any suit for damages), while in fraud,
he can sue for damages also (apart from his right to rescind or restitution).
iv.
In
misrepresentation, the aggrieved party cannot avoid the contract if he
could discover it with ordinary diligence, while in fraud, in case of active
concealment, the contract is voidable even though the aggrieved party had means
of discovering the truth.
For more details, refer to
Mercantile law, by Asok Nadhani, BPB Publications, www.bpbonline.com, bpbpublications@gmail.com
