DAMODARAM SANJIVAYYA NATIONAL LAW

UNIVERSITY
VISAKHAPATNAM, A.P., INDIA

PROJECT TITLE

FRAUD

SUBJECT

LAW OF CONTRACTS

NAME OF FACULTY

ASST PROF B.V.S. SUNEETHA

Name of candidate: AMANDEEP MALIK

Roll Number: 2019076

Semester: 2

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 ACKNOWLEDEGEMENT

I would like to express my special thanks of gratitude to my teacher B.V.S. SUNEETHA, who
gave me the opportunity to do this wonderful project on the topic FRAUD, which also helped
me in doing a lot of research and I came to know about so many new things about problems
which are faced by the country.

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 TABLE OF CONTENTS

ABSTRACT......................................................................................................................... 4

SYNOPSIS ........................................................................................................................... 5

INTRODUCTION ............................................................................................................... 6

DEFINITION OF FRAUD ................................................................................................. 6

Illustrations of fraud........................................................................................................ 7

INGRIDIENTS OF FRAUD ............................................................................................... 7

1. assertion of facts without belief in truth- .................................................................... 7

2. the active concealment of a fact ................................................................................. 10

3. promise made without intention of performing. .......................................................... 15

4. any other act fitted to decieve. ...................................................................................... 16

5. any act or omission specially declared to be fraudulent. ............................................. 16

EVIDENCE AND BURDEN OF PROOF IN FRAUD .................................................... 16

EFFECT OF FRAUD........................................................................................................ 17

DAMAGES FOR FRAUD ................................................................................................ 17

DISTINCTION BETWEEN FRAUD AND MISREPRESENTATION.......................... 18

CHEATING IN IPC .......................................................................................................... 19

CHEATING IN CONTRACTS ........................................................................................ 20

CHEATING IS A CRIMINAL ACT OR MERE CIVIL WRONG ................................ 21

FRAUD IN IPC ................................................................................................................. 21

DISTINCTION BETWEEN FRAUD AND CHEATING ................................................ 21

CONCLUSION ................................................................................................................. 22

BIBLIOGRAPHY ............................................................................................................. 23

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 ABSTRACT

Fraud is defined in simple words as cheating or to cheat someone, active concealment of facts.
As per section 17 of INDIAN CONTRACT ACT, 1872 the following acts constitute a fraud:
A wrong statement by a person who knows that the statement is wrong, active concealment of
the fact by a person who has the knowledge of the fact, a promise without intention of
performing it, any other act that fit to deceive ( cheat), any other act which the contract act
specifically declares to be fraudulent. Fraud covered wide scope and is defined under many
acts like contract, IPC, company law and many other acts.

It is general rule that if seller remains silent and he does not disclose the facts which might
affect the willingness of buyer to purchase the goods such silence of seller will not amount to
fraud.

These abovementioned points are a brief about the fraud. In this project I will discuss about the
abovementioned points in detail. I will explain or describe above points with the help of
practical examples. I will explain the fraud with the help of case laws and explain different
interpretation of fraud given in different acts.

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 SYNOPSIS

OBJECTIVE OF THE STUDY:

The objective of research are-

1. To understand the concept of fraud in detail.

2. To understand how fraud is interpreted and used in different acts.

3. To learn how courts apply fraud in the real situation (case laws).

RESEARCH QUESTION:

The research question helped in providing adequate emphasis to the core issue of the research
and based on the issue the research study use to be conducted. Therefore, as the research
question focus on the core issue of the research study, it plays important role in this study.

1. whether the fraud has real life application and how fraud interpreted in different acts?

2. whether fraud interpreted in wider sense or shorter sense?

RESEARCH METHODOLOGY:

The study is based on the doctrinal method of research and both primary and secondary sources
are taken into consideration while making it like websites, books, and other internet sources.
This research deals with collecting & analysing information within the boundaries of the topic.

SCOPE OF THE STUDY:

The scope of the study is wide because in this project I will discuss about concept of fraud not
only given in contract act but also given in IPC, company law etc. and also explain the concept
of fraud with the help of practical examples and case laws.

SIGNIFICANCE OF THE STUDY:

The project helps me to understand about the concept of fraud and how people frauded in the
real life with the help of case laws.

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INTRODUCTION-

Fraud is defined in simple words as cheating or to cheat someone, active concealment of facts.
Fraud means intentional misrepresentation of facts, speaking broadly is called “fraud”.
According to section 17 of Indian contract act, 1872 fraud defined- “fraud” means and
includes any of acts committed by a party to a contract, or with his connivance, or by his agent,
with intent to deceive another party thereto or his agent, or to induce him to enter into the
contract- 1. the suggestion, as a fact, of that which is not true, by one 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 specially declares to be fraudulent. These above 5 points are
the constituents of fraud means if any person done any of the above point then he commits the
act of fraud. Like in the first point if any suggestion made by one person to another person
which other person believe it not to be true and you give that suggestion to another person then
it is a fraud. In second point active concealment of fact means you know that this fact is not
true and you tell that fact to other person then this is also fraud. So this is how fraud is defined
in section 17 of Indian contract act.

DEFINITION OF FRAUD

According to section 17-

FRAUD Defined- “Fraud” means and includes any of acts committed by a party to a contract,
or with his connivance, or by his agent, with intent to deceive another party thereto or his agent,
or to induce him to enter into the contract-

1. The suggestion, as a fact, of that which is not true, by one 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 specially declares to be fraudulent.

Explanation- Mere silence as to facts likely to affect the willingness of a person to enter into a
contract is not fraud, unless the circumstances of the case are such that, regard being had to

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them, it is the duty of the person keeping silence to speak, or unless his silence is, in itself,
equivalent to speech.

Illustrations of fraud-

1. 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.

Explanation- in the above illustration there is no fraud by A because B doesn’t ask from a that
the horse is sound or not if here B ask from a that the horse is sound or not and then if A not
give any answer then he is liable for fraud. So that’s why A is not liable for fraud in the above
illustration.

2. B is A's daughter and has just come of age. Here, the relation between the parties would
make it A duty to tell B if the horse is unsound.

3. B says to A-"If you do not deny it. I shall assume that the horse is sound". A say nothing
Here A's silence is equivalent to speech.

4. A and B, being traders, enter upon a contract. A has private information of a change in prices
which would affect B’s willingness to proceed with the contract. A is not bound to inform B.

An act must be limited to actions committed by a party to contract with an intention to deceive
or compel another party or his agent to enter into a connection in order to amount to fraud.
Fraud that is vitiating the contract must have a connection with the actions of the contracting
parties. This description emphasizes the precondition for proving the motive of the person who
committed the fraud. If that person has committed a crime willingly then he will be punished.
The person here means himself, or his handler. False claims or concealment of evidence or
false statements, or any dishonest act to deceive others, are actions which involve fraud.

INGRIDIENTS OF FRAUD

1. ASSERTION OF FACTS WITHOUT BELIEF IN TRUTH-

In English law "fraud" was defined in the well-known decision of the House of Lords in Derry
v Peek Lord HERSCHELL said:

"Fraud is proved when it is shown that a false representation has been made, -

1. knowingly, or

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2. without belief in its truth, or

3. recklessly careless whether it be true or false.”

Representation-

A representation is a statement of fact, past or present and is distinct from a statement of

opinion, whereas a statement of opinion can in some cases be treated as a statement of fact.
The dishonest misrepresentation must be material to allow the delegate to escape the
agreement, i.e. to have influenced a fair man in deciding whether or not to enter into the
agreement. A false certificate was obtained in Lillykutty v Scrutiny Committee for the intent of
taking undue advantage. It was held that every solemn act vitiates fraud. The Courts will not
promote dishonest acts. Every action by the authorities or by individuals claiming a right /
privilege under the Indian Constitution which subverts the constitutional intent must be
regarded as constitutional fraud.

False representation made without belief in its truth-

To prove a fraud case, it must be proven that the representations made were incorrect to the
knowledge of the party making the representations. The argument must be and always must be
false in nature. Strong Fallacy Awareness is not a criterion. In order to constitute fraud, it is
necessary for the person concerned to have made the statement with knowledge of his
falsehood, or without believing in his truth. Also pure ignorance of the reality or falsehood of
material claim, which, nevertheless, turns out to be erroneous, is considered to be equal to the
knowledge of its untruth, as well as when the representative feared that his argument could be
incorrect or that he had forgotten to inquire into its correctness. It was called deception in
Jewson & Sons Ltd v Arcos Ltd, giving a false impression and causing a individual to act upon
it, even though each truth taken by itself would be literally real.

False representation has been made recklessly-

All that is required to satisfy the presence of fraud, whether the representation is made
recklessly or intentionally, is proof of the absence of true and honest belief; ignorance or
recklessness on the part of the representative as to the reality or falsehood of the representation
merely affords an instance of such absence. Comments made without trusting in the facts will
include statements made with imprudence. Misrepresentation of the title made recklessly or
with gross negligence by the vendors cannot avoid the accusation of dishonest
misrepresentation.

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Case law-

DERRY V PEEK-

FACTS

In this case: The prospectus of a company included a statement that the company was allowed
to operate trams by steam or mechanical power through a special act of Parliament. In fact, the
authority to use steam was subject to Board of Trade approval, but no mention has been made
of that. The Board denied approval and the company was subsequently wound up. Having
bought some shares, the plaintiff sued the directors for fraud. Yet they'd not been left
accountable.

We were not guilty of deception because we sincerely assumed that the Board's approval was
basically implied once Parliament had approved the use of steam. It follows, then, that if he
truly believes in his facts, the person making a false representation is not guilty of fraud.

Therefore, intentional misrepresentation is the essence of fraud. Section 17's first three clauses
deal with that kind of fraud.

JUDGEMENT

We were not guilty of deception because we sincerely assumed that the Board's approval was
basically implied once Parliament had approved the use of steam. It follows, then, that if he
truly believes in his facts, the person making a false representation is not guilty of fraud 1.

The House of Lords held that the intervention of the shareholders failed because the director
was not proven to lack honest confidence in what they had said. However, Lord Herschell
pointed out that while the unreasonableness of the grounds of belief is not deceptive, it is
evidence from which deception can be inferred. There are many cases, "where the fact that an
alleged belief was destitute of all reasonable foundation would suffice of itself to convince the
court that it was not really entertained, and that the representation was a fraudulent one."

SIGNIFICANCE

The deception torture would only have been created if the misstatements had been produced
fraudulently. The possibility of majority judges at the Court of Appeal in Heaven v Pender was

1
Derry v. peek (1889) 14 AC 337.

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thus affirmed by Derry v Peek. In other words, in order for deception or fraud to occur (which
is the same), it must be proven that a defendant:

(i) knows that a statement is false, or

(ii) does not believe in its validity, or

(iii) is naive as to whether it is true or not.

Derry v Peek further clarified that, in relation to non-fraudulent misrepresentation, no

obligation should be imposed without the existence of a contract, a fiduciary relationship,
deception or deceit; but this was later overruled in Hedley Byrne v Heller.

The finding that the directors "had an sincere confidence in the argument" runs contrary to the
facts that while they hoped to receive planning permission as a mere formality, they clearly
realized they had no such permission yet.

2. THE ACTIVE CONCEALMENT OF A FACT.

"Active concealment" is something different from mere "passive concealment" 2. Passive

concealment means mere silence as to material facts.

An active concealment of a material fact is a fraud; mere silence, excepting the few cases noted
below, does not amount to fraud.

Naturally, the term "any other act fit to deceive" implies any act that is performed with the
apparent intention of committing fraud. For instance, a husband forced his illiterate wife to sign
certain documents telling her he was going to mortgage her two lands to protect his
indebtedness and in reality mortgaging four lands belonging to her. This was an act performed
designed to trick her.3 Where a person surrendered his land to the State accepted after
investigation but the land had already been acquired under the Land Acquisition Act, it was
held that the fact of inquiry could not wipe out the outcome of fraud. The surrender transaction
had been a nullity. Where the seller of the property did not reveal his money with 6 per cent
interest to the buyer awaiting litigation over the house, the buyer was entitled to recover his
money.

2
Gowrishankar v. joshi amba Shankar family trust, (1996) 3 SCC 310.
3
ningawwa v. byrappa shiddappa hireknrabar, AIR 2004 SC 1227.

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 Mere silence is no fraud-

False perception is typically transmitted by deliberate mistaking of evidence. But this can also
be achieved by the deliberate concealment of material information. "I don't know," said Lord
HALSBURY, "by what a false idea is conveyed-by what trick or tool or vague language, all
these are expedients by which dishonest people seem to believe they can avoid the real nature
of the transaction. Normally, of course, pure silence is no fraud, even if its result is to hide"
information likely to influence a person's willingness to do so. A negotiating party is under no
duty to reveal to the other party the whole truth or to give him all the details in his possession
that affects the subject matter of the agreement. It is by this theory that a trader can remain
silent about a price change. A seller who created an unsound horse for sale but said nothing
about its price, does not commit any fraud. A applicant, who was well aware of the fact that he
was short of attendance, did not mention this fact in his examination form in a case before the
Supreme Court.4 This was held to be no fraud, it was the University's duty to scrutinize forms
and, in case of doubt, to call for clarification or proof. Having failed to do so, the University
was stalled from canceling the candidate's exam country.

For three years a house was let out without disclosing to the owner that it was in such a ruinous
and unsafe condition as to be unfit for occupancy, a fact in the possession of the landlord. Upon
discovering this fact, the tenant applied for the contract to be set aside, claiming that the
landlord should have disclosed the real state of the building. The court hasn't given the relief.
No assurance was provided that the house would be fit for immediate occupation. No
misrepresentation was rendered, nor was it the case that the plaintiff was acting on the
impression created by any actions on the owner's part as to the condition of the house or that
he was not to investigate until he started residing in it. The owner was not obligated to say
anything about the state of the house.5

Misdeclaration in application form

In a petroleum product dealership case, the applicant made a misdeclaration in the application
form about his profits. It has been held that it was necessary to cancel the letter of intent given
to him. The argument that the erroneously stated truth had no hearing on the condition of
eligibility was not acknowledged. 6

4
Shri Krishnan v. Kurukshetra university, (1979) 1 SCC 311.
5
Keats v earl of Cadogan, (1851) 20 LJ CP 76.
6
Shiv kant Yadav v. Indian oil corpn, AIR 2007 SC 1534.

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 When silence is fraud-

But then how far my silence go? Silence may become deceptive in certain cases.

1. Duty to speak (contracts uberrima fides)

The first case of this kind is where the person who stays silent is obliged to speak Duty to speak
occurs when one contracting party puts confidence and trust in the other. For example, a father
who sells a horse to his son must tell him whether the horse is unsound, because the son will
probably depend on his father. But it's not that limited in theory. The obligation to expose the
truth will emerge in all situations where one-party reposes, and the other accepts trust, "the
obligation to speak often exists where one of the parties is absolutely without any means of
knowing the truth and must rely on the other party's good sense. For example, an insurance
company knows nothing of the life or circumstances of the insured individual. It has to depend
on the reveals made by the assured. Therefore, it is the assured's obligation to put the insurer
in control of all the relevant facts surrounding the covered danger. For this reason, an insurance
contract is called an absolute good faith contract, uberrima fides. Where false answers were
given as to the state of health in a life insurance plan, the policy was considered voidable
because it was not material that the corporation's medical officer had approved the life assured
as healthy. 7 Where a person had his motor vehicle insured at night, when the car had
experienced an accident in the morning, the policy was considered not enforceable, the insurer's
responsibility to inspect the car nonetheless. The burden of proof lies on the insurer to prove
that the fact that the risk covered was misrepresented or obscured was of a material nature, and
that the same was done to trigger doubt about the insurer's danger.

There is no requirement to talk in the absence of any such partnership and pure silence, even
though it amounts to misrepresentation, would not be fraud. At Haji Ahmad Yarkhan v Abdul
Gani Khan for example:8

The complainant paid a sum of money to mark his son's marriage. He then found out the girl
suffered from epileptic fits and therefore broke off the engagement. He sued the other party to
obtain from them compensation for the damage he had suffered due to their deliberate omission
of a vitally important truth that amounted to fraud.

7
P. sarojan v. LIC, AIR 1986 Ker 201.
8
AIR 1937 Nag 270.

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The court relied on the House of Lords decision in Nocton v Lord Ashburton9 where it was
pointed out that, when there is a obligation to speak, a mere passive non-disclosure of the facts,
however misleading indeed, does not equate to fraud. Referring to the facts, the court said that
the law does not place a general obligation on anyone to transmit the defects of their female
relationships, not even to those who propose marriage with them. The parties had no fiduciary
relationship. Nonetheless, owing to the misrepresentation, the agreement was held to be
voidable but the claimant was not entitled to recover any compensation under Section 75 of the
Contract Act.

2. Where silence is deceptive-

Silence is also tantamount to expression itself. Far less culpable of fraud is a person who stays
quiet, who knows that his silence is going to be deceptive. For example, where the buyer knows
more about the value of the property, which is the subject of the sale, but prefers to retain the
seller's details, the latter that annul the sale.

3. Change of circumstances-

Often a statement is valid when it is made, but, due to a change in circumstances, it can become
inaccurate when the other party actually acts on it. In these situations, notification of the change
of circumstances is the responsibility of the individual who made the representation. In an
English case,

With v O’ Flangan, 1936

FACTS

In January 1934, Dr O'Flanagan truthfully said his private practice had cost £2000 pa. The
takings, however, were just £5 a week in May because O'Flanagan had become sick. The deal
to purchase the medical practice was signed with Mr. With but Mr. O'Flanagan did not
announce the change in circumstances. 10

The judge held this at court, as the contract was not made uberrimae fidei. Where a statement
is made incorrect by a change of circumstances there is a obligation to make the change known.
A failure to do so would result in misrepresentation that can be acted upon.

JUDGEMENT

9
(1914-15) All ER Rep 45 (HL).
10
(1936) Ch 575.

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Lord Wright MR argued that Mr With was entitled to revoke either because there was a
obligation to point out the change of situation, or because the consultation lasted to the point
of signing the contract. He related to Fry J in Davies v London Provincial Marine Insurance
that there is no requirement to report, even though someone feels the facts are running on the
mind of others. He acknowledged that fiduciary relationships would carry a full disclosure
requirement. Uberrimae fidei arrangements do likewise, including alliance and maritime
insurance. But even if a statement is incorrect in negotiations and it is then realized by the
leader, as if he had said nothing he is entitled to hold his tongue all along. He noted that a
'representation made as an opportunity to enter into a contract shall be regarded as continuing
representation.'

Romer LJ stated,

“I agree. The only principle invoked by the appellants in this case is as follows. If A with a
view to inducing B to enter into a contract makes a representation as to a material fact, then if
at a later date and before the contract is actually entered into, owing to a change of
circumstances, the representation then made would to the knowledge of A be untrue, and B
subsequently enters into the contract in ignorance of that change of circumstances and relying
upon that representation, A cannot hold B to the bargain. There is ample authority for that
statement and, indeed, I doubt myself whether any authority is necessary, it being, it seems to
me, so obviously consistent with the plainest principles of equity.”

SIGNIFICANCE

This follows a general principle that if one party knows it, any alteration to a basic justification
for contracting (supervening falsification) must be communicated. It doesn't matter what the
purpose or motivation for not being able to connect is, it doesn't need to be malicious or
deceptive, but clearly known to the representative.

T.S. Rajagopala iyer v south Indian rubber works ltd, 1942

The change of circumstances would have been announced, it was held. Likewise, in a case
before the High Court of Madras. 11

"The prospectus of a corporation indicated that some individuals would be the company's
directors, which was true, but before the allocation took place there were changes in the

11
(1942) 2 MLJ 228.

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directorate, with some directors leaving." This was deemed sufficient to allow an allottee to
prevent the allocation.

4. Half-truths-

Even when a person has no obligation to disclose a fact, if he discloses anything willingly and
then halts the way, he can become guilty of fraud by non-disclosure. A individual can remain
silent, but if he speaks, then there is a obligation to disclose the whole truth. "Everyone knows
that half a truth is no better than a veritable lie at times."12 In a US case, for example:

The plaintiff bought a piece of land. The selling contract specified that the land had been subject
to the Borough's right to open two streets within the city. But the Borough did have the right
to open three streets as a matter of fact. Holding that the complainant had the right of rescission,
CARDOZO CJ said: "We do not claim that the seller was under the obligation of mentioning
the planned streets at all. The problem is not here. What we mean is merely this, the having
undertook or professed to mention them, he could not stop before halfway."

Like in the case of misrepresentation, so in the case of silence theft, if the complainant had the
means by ordinary diligence to discover the facts, he cannot get rescission. But the dishonest
party cannot claim the other should have learned the truth in any other ease. For example, in
one case before the Gujarat High Court:13

In a tender, fake estimates of the construction costs were given. The contractor agreed to any
reduction on the assumption that the calculation was correct. The court held that the claims
found in the tender were false, and that the plaintiff might have discovered the true cost by fair
efforts was not a defence.

3. PROMISE MADE WITHOUT INTENTION OF PERFORMING.

To bind a person to a promise without the intention of delivering from one hand and with the
intention of preventing only the other from communicating with others, is an example of a
commitment made without the intention of fulfilling it. That is the third form of fraud included
in Section 17's description. A purchasing of goods without any intention to pay the price is a
kind of fraud. A builder entered a large number of bookings, almost three times the
accommodation units available, and collected revenue. The Supreme Court found this to be
deception as he ought to have known he would not be able to fulfil the deal with all of them.

12
Gluckstein v. barnes, 1900 AC 240, 250.
13
R.C. Thakkar v Bombay housing board, AIR 1973 Guj 34.

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There was no interest clause on money in the account. He was left liable to pay interest in spite
of this. The Court said there was fraud causing such fraud to encourage buyers to book it
generates liability even beyond the agreement.14

4. ANY OTHER ACT FITTED TO DECIEVE.

The fourth form of fraud defined in Section 17 is any act that is reasonable to deceive. In a case
before the Calcutta High Court where a solicitor casts aspersion on the court as well as on the
opposite lawyer, the court generally quoted the following assertion on the principle of fraud:
fraud was described in Section 17 of the 1872 Contract Act. As per interpretation of the statute,
two kinds of fraud are mentioned, (i) actual or positive fraud which includes cases of intentional
and successful employment of any cunning, deception, or artifice, used to circumvent, cheat or
deceive another, and (ii) constructive or legal fraud which includes such contracts or acts as
though not originating in any actual evil design or contrivance to perpetrate a fraud yet, by their
tendency to deceive or mislead others, or to violate private or public confidence, are prohibited
by law.15

5. ANY ACT OR OMISSION SPECIALLY DECLARED TO BE FRAUDULENT.

The latter group covers situations where the law expressly considers fraudulent an act or
omission. For example, the Insolvency Act and the Companies Act considers such forms of
transfer to be "fraudulent choice" The fifth and final category of fraud contained in the scope
of Section 17 is intended to include all such acts that are deemed fraudulent by any other branch
of law. For example, in insolvency law there is the concept of fraudulent choice, and the
principle of fraudulent transfer is found in the Transfer of Property Act.

These terms seem to have been added to insure that there is documentation of all forms of
deliberate theft and nothing of the sort escapes.

EVIDENCE AND BURDEN OF PROOF IN FRAUD

Fraud is not capable of being identified by substantive and observable evidence in a vast
majority of cases. In its movements it is by its very nature unknown. Unless the proof given is
such that may lead to wrongdoing, then it is clear that fraud must have been committed. For
most cases, the only method for dealing with fraud issues is circumstantial evidence. If this

14
DDA V Skipper construction Co (P) Ltd, (2000) 10 SCC 130.
15
Hungerford investment trust ltd v turner morrison & Co ltd, (2009) 2 CHN 330.

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were not allowed the ends of justice would be undermined regularly, if not always.
Simultaneously, fraud involvement is only to be based from a deliberate wrongdoer. As a
remedy for restitution, all real damages arising from fraud may be recovered, even though they
could not have been reasonably foreseen; subject to the defrauded party's mitigation law. The
liability will not be diminished due to contributory negligence, either.

EFFECT OF FRAUD

Under s 19 a contract, for which consent is obtained through fraud, is voidable. The misled
party has the option of affirming the contract and demanding that it be put in the position in
which it would have been if the representations were valid, or that it may revoke the contract
to the degree that it is not enforced. He is liable to restore the benefit he receives under s 64
upon rescission, and may recover damages. The calculation of recoverable damages is basically
that attributable to the tort deception, i.e., all the real loss resulting directly from the transaction
covered by the fraud, including the heads of consequential harm, and not only the harm that
was fairly 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 the fraud causes a contract, the claimant is entitled to claim rescission, or damages, or
both. With such action, he will have a remedy, even though restitutio in integrum is not possible
as in Indranath Banerjee v Rooke. In Firbank's Executors v Humphreys, under the general rule,
the damages for false misrepresentation were achieved by considering the disparity between
the position in which the plaintiff should have been in, if the representation were valid and in
the position in which he is currently in, as a consequence of this being valid.

Case law

Smith New Court Ltd v Scrimgeour Vickers (Asset Management) Ltd16

FACTS

Citibank loaned PII (Parent Companies Incorporated) £23M. PII secured the loan amounting
to £28 M on shares owned in Ferranti International Signal (FIS). Then, PII defaulted on the
loan. In July 1989 through a broker, the defendant (Scrimgeour Vickers), Citibank sold the

16
[1996] 3 WLR 1051.

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stock in FIS to the complainant (Smith New Court Securities) for £23 M (82p per share). Mr
Roberts was a senior Citibank employee, and the sale was orchestrated by a defendant company
director. He told the complainant that there had been two more offers on the shares when there
had actually been no other offers. The market value of the shares was listed as 78-82p per share,
but FIS had committed a massive fraud which meant the market value was fictitious. This
became evident in Sept 1989. Smith subsequently sold the small-parcel shares between
November 1989 and April 1990 for rates between 30-49p per share, resulting in a loss of
11.3M.

JUDGEMENT & REASONING

Lord Browne-Wilkinson has set out in Smith New Court Ltd v Scrimgeour Vickers (Asset
Management) Ltd the criteria relevant to seeking damages for fraudulent misrepresentation:

The defendant shall make reparations for any losses directly arising from the
transaction;
While such harm was not inevitable, the transaction must have caused it directly;
In determining the harm done by the search, the complainant shall be entitled to recover,
by way of damages, the full price incurred by him, but shall give credit for any benefits
obtained as a result of the transaction;
As a general rule, the benefits it gets on the market value of the property obtained at the
date of the sale, but the general rule is not to be enforced inflexibly where it will be
stopped from receiving full reimbursement for the wrong suffered;
The claimant has the right to recover the actual damages arising from the transaction;
The plaintiff shall take all appropriate steps to minimize the damage until the crime has
been detected.

DISTINCTION BETWEEN FRAUD AND MISREPRESENTATION

Misrepresentation and fraud both share several similarities. Of example, both make the contract
voidable: there is a misrepresentation in both; in any case it is important that the agreement
would have been induced by the misrepresentation of the fraud and eventually, if there is a
silent fraud, the fact that there were ways of finding the truth by ordinary vigilance "is a
reasonable protection. 17 Loss from negligence due to innocent misrepresentation is measured

17
S.19 Exception.

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under the same standards as in the case of intentional fraud.18 And the following distinguishing
points are also noticeable:

Firstly, fraud is more or less an intentional wrong. whereas misrepresentation may be quite
innocent.

Secondly, fraud, in addition to rendering the contract voidable, is a cause of action in tort for
damages. Simple misrepresentation is not a tort but under Section 75 of the Contract Act, "a
person who rightfully rescind a contract is entitled to compensation for any damage which he
has sustained through the non-fulfilment of the contract.19 The (English) Misrepresentation
Act, 1967, also enables the court to award damages instead of rescission. A person who
purported to sell his wife's property without obtaining her con sent and she refused to sign the
deed, was held liable to the buyer for his loss. 20 A purchaser of premises completed the
purchase even after discovering that a tenancy agreement affecting one of the flats was
concealed from him. He was nevertheless allowed to sue for the loss caused to him, though he
had in tort the right to rescind. 21

Lastly, a person complaining of misrepresentation can be met with the defence that truth with
ordinary diligence”, [S. 17, Exception] but expecting fraud by silence, it does not lie in the
mouth of a person committing fraud to say that his victim was too easily deceived or had the
means of discovering the truth. “fools have to be protected against knaves.”

CHEATING IN IPC

Cheating is an unethical or deceptive act done to gain advantage over the other. It is a criminal
offence, and it is connected with a number of crimes. It can be used in many different ways.
Section 415 of the IPC describes cheating as someone who, by deceiving any person,
fraudulently or dishonestly induces the person so deceived to give any property to any person,
or to agree to the retention of any property by any party, or deliberately induces the party so
deceived to do or omit something he would not do or omit if he were not so deceived, Any act
or omission that causes or is likely to cause harm or damage to that person in the body, mind,

18
Royscot trust ltd v Rogerson, (1991) 2 QB 297: (1991) 3 WLR 57: (1991) 3 All ER 296 (CA).
19
Haji Ahmad Yarkhan v Abdul Gani khan, AIR 1937 Nag 270.
20
Watts v Spence, 1976 Ch 165.
21
Production Technology consultants v Bartlett, 1988 CLY 460.

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reputation or property shall be deemed to "cheat." A deceptive concealment of evidence within
the context of this section is a deception. 22

Constituents of Cheating:

An act may be considered as cheating when the following constituents is completed-

Acting Dishonestly: The term „acting dishonestly‟ has been defined under section 24
of Indian Penal Code. It is defined as, “when the doing of any act or not doing of any
act causes wrongful gain of property to one person or a wrongful loss of property to a
person, the said act is done dishonestly.”
Property: Property has a much wider meaning. It does not only include money but
other things as well which can be measured in the terms of money. The property should
be in a complete ownership of the person and he must have the full right to enjoy its
possession.
Fraudulently: Being fraudulent means which involves deception mainly criminal
deception. It is characterized by fraud. According to section 25 “a person is said to do
a thing fraudulently if he does that thing with intent to defraud but not otherwise.”
Mens Rea: Mens rea is the intention or action to constitute a crime. It is a mental state
of an offender while committing a crime. It has to be proved beyond any doubt that the
accused has actively contributed in a crime and that crime has affected another
person‟s property.

CHEATING IN CONTRACTS

A pure contract violation isn't going to be a cheating. Prior deceptive motive is required for the
offence. For example: A singer agreed to perform at a specific concert and asked their organizer
to arrange an orchestra. The organizer made all arrangements necessary according to the
contract. The singer arrived at the concert spot and everything was set to go. Meanwhile, for
his personal reasons singer backed out from recording. The organiser has lodged a lawsuit
against the singer for cheating. The gap between cheating and breach of contract is very small.
For some kind of cheating a deceiving substance has to exist right from the start of the contract.

22
Explanation of Section 415 of Indian Penal Code 1860.

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 CHEATING IS A CRIMINAL ACT OR MERE CIVIL WRONG

A civil error is merely a matter between two parties. For example, breach of contract, failure
to refund a loan etc. Civil wrongs are matters which in no way affect society. Act that has the
potential of harming society at large is considered a criminal error. Cheating in the same way
as defamation is, is both a civil and a criminal error. Several difficulties occur when a criminal
case is launched, for example- trouble in applying for passport. The court therefore sees that
stealing is not used as a tool for bullying the defendant. Court is applying its brain and cheating
in any situation. If the court is of the opinion that the consequence of cheating is of a more
moral nature it sets moral procedure in motion. While a cheating is mostly dealt with criminally
in a few cases such as chit fund cases where there is a wide stake of people.

FRAUD IN IPC

In criminal law fraud is not defined at all. It is an act of intentional deceit, creating something
to be gained by taking unfair advantage of another. It is a sorrow to gain by the failure of
another. Whenever the word fraud or defraud occurs within criminal law, two things are to be
inferred immediately.

First- deceiving or deceiving someone and

Second- harm to anyone because of such deceit.

The following parts of the IPC, namely Sec. 421, Sec. 422, Sec. 423 and Sec. 424, include an
implication of fraud.

Fraudulent disappearance or concealment of properties to discourage creditors from

being allocated (Section 421 IPC) •
Fraudulently prohibiting creditors from making debts available. (Section 422 IPC)
Fraudulent execution of a transfer deed that includes a false declaration of
consideration.
Illegal removal or concealment of land, (Section 423 IPC). (IPC section 424)

DISTINCTION BETWEEN FRAUD AND CHEATING

Fraud-

1. Fraud ramifications are discussed in section 421, 422, 423, 424 of Indian Penal Code, 1860.

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2. To gain an unfair advantage over the other is a deliberate deception. It's done to benefit from
loss of another.

3. The purpose to cheat is sufficient to sustain the claim for fraud.

4. Fraud is generally more related to contracts.

Cheating-

1. Chapter 415 to 420 of the Indian Penal Code, 1860, provides for this.

2. It is act of dishonesty to gain advantage over the other.

3. There are two situations necessary to subscribe to section 415, i.e. deception and inducement,
in order to maintain the cheating suit.

4. The cheating is not limited to contracts only.

CONCLUSION

After doing study on fraud we can easily give the answers of our research questions. Yes, we
can say that fraud has real life application because in this project we can see that all the concepts
are explained with the help case laws which are real life situations so we can say that fraud has
real life application. Our second research question is that fraud is a wider concept or smaller
concept so here we can easily say that fraud is a wider concept because in this project we can
see that fraud have 5 ingredients and in these 5 ingredients many concepts are which explains
that in which situation there is a fraud and in which situation there is no fraud. Here in this
project I have also explained the concept of cheating which also show fraud is not only a wrong
in contracts act but also an offence in Indian penal code So all these points give answer of our
second research question. I have also learned many new concepts by doing this project.

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 BIBLIOGRAPHY

BOOKS

1. LAW OF CONTRACTS by Dr Avtar Singh.

2. INDIAN CONTRACTS ACT, 1872 by Pollock & Mulla.

ARTICLE

3. A SOCIO LEGAL STUDY OF FRAUD AND CHEATING by Dr Shamsuddin.

ONLINE RESOURCE

4. ipleaders.in

CASE LAWS

5. Derry v Peek

6. Haji Ahmad Yarkhan v Abdul Gani Khan

7. With v O’ Flangan

8. T.S. Rajagopala Iyer v south Indian rubber works Ltd

9. Smith New Court Ltd v Scrimgeour Vickers (Asset Management) Ltd

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