Page |1

Law of Contracts Project

On
Topic: Distinction between
Fraud and Misrepresentation

Submitted by:

Student Details
Name: Helik Soni
Roll No: 1007al0027
Batch: 2020-2025
Section: A
 Page |2

Distinction between
Fraud and Misrepresentation
Contents
FRAUD.......................................................................................................................................3
ESSENTIALS OF FRAUD......................................................................................................3
False statement of fact [SECTION17 (1)]...................................................................3
Mere silence is no fraud................................................................................................4
EXCEPTIONS:-......................................................................................................................5
DUTY TO SPEAK ( Contracts Uberrima Fides)..........................................................5
SILENCE BEING EQUIVALENT TO SPEECH..................................................................6
Means of discovering the truth........................................................................................6
ACTIVE CONCEALMENT [section 17(2)].....................................................................6
PROMISE MADE WITHOUT ANY INTENTION TO PERFORM IT [section 17(3)]..7
ANY ACT OR OMISSION WHICH THE LAW DECLARES AS FRAUDULENT [section
17(4)]................................................................................................................................7
ANY ACT OR OMISSION WHICH THE LAW DECLARES AS FRAUDULENT [section
17(5)]................................................................................................................................7
Contracts on the basis of false statement:-....................................................................8
DAMAGES FOR FRAUD.......................................................................................................8
CONCLUSION:-.....................................................................................................................9
MISREPRESENTATION...........................................................................................................9
Misrepresentation means and includes-.......................................................................9
NEGLIGENT MISREPRESENTATION:-........................................................................10
INNOCENT MISREPRESENTATION:-..........................................................................10
DAMAGES FOR MISREPRESENTATION.........................................................................11
Difference Between Fraud and Misrepresentation.......................................................12
Conclusion..............................................................................................................................13
 Page |3

FRAUD
According to section 17 of the Indian Contract Act, 1872 “FRAUD” means and includes any
of the following acts committed by a party to a contract, or by his agent, with intent to
deceive another party thereto or his agent, or to induce him to enter into the contract:

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.

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

ESSENTIALS OF FRAUD
According to Section 17, following are the essentials of Fraud:-

There should be a false statement of fact by a person who himself does not believe the
statement to be true.

The statement should be made with a wrongful intention of deceiving another party thereto
and inducing him to enter into the contract on that basis.

False statement of fact [SECTION17 (1)]

In order to constitute fraud, it is necessary that there should be a statement of fact which is
not true. Mere expression of opinion is not enough to constitute fraud.

For example – A person, who is aged over 60 years and thus beyond insurable age,
deliberately makes a false statement that his age is 48 years in order to take out an insurance
policy, it amounts to fraud, and the insurer is entitled to avoid the policy.

In Edington vs. Fitzmaurice1, a company was in great financial difficulties and needed funds
to pay some pressing liabilities. The company raised the amount by the issue of debentures.
1 1885) 29 Ch. 459, Indian contract act, RK Bangia
 Page |4

While raising the loan, the directors stated that the amount was needed by the company for its
development, purchasing assets and completing buildings. It was held that the directors had
committed a fraud.

Mere silence is no fraud

It has been noted above that to constitute fraud; there should be a representation as to be
certain untrue facts. Active concealment has also been considered to be equivalent to a
statement because in that case, there is a positive effort to conceal the truth and create an
untrue impression on the mind of the other. Mere silence, however, as to facts in no fraud.
Explanation to “section 17”, in this connection, incorporates the following provision:

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

In KEATES vs. LORD CADOGAN2, A let his house to B which he knew was in ruinous
condition. He also knew that the house is going to be occupied by B immediately. A didn’t
disclose the condition of the house to B. It was held that he had committed no fraud.

In SHRI KRISHAN vs. KURUKSHETRA UNIVERSITY3, Shri Krishan, a candidate for the
L.L.B. part1 exam, who was short of attendance, did not mention that fact himself in the
admission form for the examination. Neither the head of the law department nor the
university authorities made proper scrutiny to discover the truth. It was held by SC that there
was no fraud by the candidate and the university had no power to withdraw the candidate on
that account.

2 (1851) 10 C.B. 591 https://www.lawteacher.net/cases/keates-v-cadogan.php

3 A.I.R. 1976 S.C. 376 https://indiankanoon.org/doc/1555878/
,and https://indiankanoon.org/doc/599962/ Raipur, A.I.R. 1967 M.P. 194.
 Page |5

EXCEPTIONS:-

When there is a duty to speak, keeping silence is fraud.

When silence is, in itself, equivalent to speech, such silence is a fraud

DUTY TO SPEAK ( Contracts Uberrima Fides)

When the circumstances of the case are such that, regard being had to them, it is the duty of
the person keeping silence to speak, keeping silence in such a case amounts to fraud. When
there is a duty to disclose facts, one should do so rather than to remain silent.

In LIFE INSURANCE CORPN. OF INDIA V. ASHA GOEL4, the apex court explained:

The contracts of insurance including the contract of life insurance uberrima fides and every
fact of material must be disclosed, otherwise, there is good ground for rescission of the
contract. The duty to disclose material facts continues right up to the conclusion of the
contract and also implies any material alteration in the character of risk which may take place
between the proposal and acceptance. If there are any misstatements or suppression of
material facts, the policy can be called into question. For determination of the question
whether the suppression relates to a fact which is in the exclusive knowledge of the person
intending to take the policy and it could not be ascertained by a reasonable inquiry by a
prudent person.

Marital status – Non-disclosure

Non-disclosure of material facts relating to parties to the marriage has been held to constitute
fraud within the meaning of section 17 of the Indian Contract Act, 1872.

4 A.I.R. 2001 S.C. 549(https://indiankanoon.org/doc/1527980/ ). also Ratan Lal vs.

Metropolitan Ins. Co. ltd., A.I.R. 1959 Pat. 413. (https://indiankanoon.org/doc/1726479/ )
 Page |6

In KIRAN BALA vs. BHAIRE PRASAD SRIVASTAVA5, first marriage of the appellant,
Kiran Bala, had been annulled on the ground that she was of unsound mind at the time of that
marriage. She was married to the respondent, Bhaire Prasad Srivastava, the second time. The
fact of the annulment of the first marriage on the ground that she was an idiot was not
disclosed to the bridegroom either by the girl or her parents. It was held that it was not the
duty of the bridegroom to find out these facts, but it was the duty of the girl or her parents not
to conceal these facts. Consent of the bridegroom was held to have been obtained by fraud,
and the second marriage of the appellant with respondent was, therefore, annulled by a decree
under section 12(1) (c) of the HINDU MARRIAGE ACT.

SILENCE BEING EQUIVALENT TO SPEECH

Sometimes keeping silent as to certain facts may be capable of creating an impression as to

the existence of a certain situation. In such a case, silence amounts to fraud.

Means of discovering the truth

“If such consent was caused by misrepresentation or by silence fraudulent within the meaning
of section 17, the contract, nevertheless, is not voidable, if the party whose consent was so
caused had the means of discovering the truth with ordinary diligence”

In SHRI KRISHAN vs. KURUKSHETRA UNIVERSITY6, Shri Krishan, a candidate for the
L.L.B. part 1 examination of the university did not complete the prescribed number of
lectures which could make him eligible for appearing in the examination. He, however, filled
the examination form for appearing in the examination without mentioning the fact that his
attendance was short. The university authorities could have discovered the truth by proper
scrutiny. The university wanted to cancel the candidature of the candidate on the ground of
fraud. It was held that there was no fraud as the candidate has just kept silent as to certain
facts and further, the university authorities could have discovered the truth with ordinary
diligence.

5 A.I.R. 1982 M.P. 242. ( https://indiankanoon.org/doc/1955892/ )

6 A.I.R. 1976 S.C. 376. (https://indiankanoon.org/doc/1555878/)

 Page |7

ACTIVE CONCEALMENT [section 17(2)]

When there is an active concealment of a fact by one having knowledge or belief of the fact,
that can also be considered to be equivalent to a statement of fact, that can also be considered
to be equivalent to a statement of fact and amount to fraud. By active concealment of certain
facts, there is an effort to see that the other party is not able to know the truth and he is made
to believe as true which is in fact not so.

Example: A is entitled to succeed to an estate at the death of B. ‘B’ dies. C having received
intelligence of B’s death, prevents the intelligence reaching ‘A’ and thus induces A to sell
him his interest in the estate. The sale is voidable at the option of A.

PROMISE MADE WITHOUT ANY INTENTION TO PERFORM IT [section 17(3)]

When a person makes a promise, there is deemed to be an undertaking by him to perform it.
If there is no such intention when the contract is being made, it amounts to fraud. Thus, if a
man takes a loan without any intention to repay, or when he is insolvent, or purchases goods
on credit without any intention to pay for them, there is fraud. If, there is no such bad
intention at the time of making contract, but the promise doesn’t perform the contract, it
doesn’t amount to fraud.

ANY ACT OR OMISSION WHICH THE LAW DECLARES AS FRAUDULENT [section 17(4)]

Clause (4) provides that ‘any other act fitted to deceive’ will also amount to fraud. This
clause is general and is intended to include such cases of fraud which would otherwise not
come within the purview of the earlier three clauses.

ANY ACT OR OMISSION WHICH THE LAW DECLARES AS FRAUDULENT [section 17(5)]

According to this section 17(5), fraud also includes any such act or omission as the law
specially declares to be fraudulent. In such cases, the law requires certain duties to be
performed, failure to do which is expressly declared as a fraud.
 Page |8

In AKHTAR JAHAN BEGAM vs. HAZARILAL7, A sold some property to B stating in the
sale deed that he won’t be liable to B if he suffered any loss owing to A’s defective title. A
had, earlier to this transaction, sold this property to somebody else, but didn’t inform B about
it. It was held that A had committed fraud and the contract was voidable at the option of B.

Contracts on the basis of false statement:-

It is necessary that the false statement must have been made to induce the other party to enter
into the contract.

In KAMAL KANT vs. PRAKASH DEVI8, the plaintiff, Kamal Kant filed a suit against his
mother, Prakash Devi and some others seeking the cancellation of the trust deed on the
ground that his signature to it was obtained by fraud by falsely telling him that it was the
general power of attorney. The deed, in this case, was attested by the plaintiff’s father and an
advocate. The plaintiff was an educated man and had all the means to know the contents of
the document. Under these circumstances, it was held that there was no fraud in this case.

If there is a patent defect in an article supplied to a buyer and the buyer has an opportunity to
examine the same, neglects to do so, the supplier cannot be considered guilty of fraud for not
pointing out the defect.

Statement should be meant for the party misled:-

It is necessary that the misleading statement should be meant for the party who is misled. If a
person is purchasing the shares of the company on the basis of any prospectus then he can’t
sue the company later on because the prospectus is meant for an original allottee of the shares
by the company, not for the person like the present appellant who buys the shares from the
original allottee and therefore, the promoters were not liable for fraud.

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 restutio in integrum is
not possible.

7 A.I.R. 1927 All. 693 (https://indiankanoon.org/doc/450857/)

8 A.I.R. 1976 Raj. 79 (https://indiankanoon.org/doc/586963/)
 Page |9

The defendant is bound to make reparation for all the damage directly flowing from the
transaction.

In assessing such damage, the plaintiff is entitled to recover by the way of damages the full
price paid by him, but he must give credit for any benefit which he has received as a result of
the transaction.

As a general rule, the benefits received by him include the market value of the property
acquired but such general rule is not applicable where to do so would prevent him obtaining
for the wrong suffered.

In addition, 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

CONCLUSION:-
Fraud is essentially a question of fact and the person who alleges that has to prove the same.
If the plaintiff seeks the annulment of the decree on the ground of fraud or misrepresentation,
he has to specifically plead the same and mention the circumstances which can lead to the
conclusion of the existence of fraud. Merely making a mention of fraud or misrepresentation
in the pleadings is not enough.

MISREPRESENTATION
Section 18 of the Indian Contract Act, 1872 defines misrepresentation as under:

Misrepresentation means and includes-

The positive assertion, in a manner not warranted by the information of a person making it, of
that which is not true, though he believes it to be true.

Any breach of duty which, without any intent to deceive, gains an advantage to the person
committing it, or anyone claiming under him, by misleading another to his prejudice or to do
the prejudice of another claiming under him.

Causing, however innocently, a party to an agreement, to make a mistake as to the substance

of the thing which is the subject of the agreement.

Positive assertion, i.e. an explicit statement of fact by a person of that which is not true,
though he believes it to be true amounts to misrepresentation. There should be a false
statement made innocently, without any intention to deceive.
 P a g e | 10

NOORUDEEN vs. UMAIRATHU BEEVI9 is an illustration where the transaction was set
aside on the ground of fraud and misrepresentation. The defendant, who was plaintiff’s son
got a document executed from the plaintiff describing it as hypothecation deed of the
plaintiff’s property. In fact, by fraud and misrepresentation, the document executed was a sale
deed of the plaintiff’s property. The plaintiff was a blind man and the sale was for an
inadequate consideration. It was held that such a deed which was got executed by fraud and
misrepresentation, was rightly set aside.

NEGLIGENT MISREPRESENTATION:-
Negligent misrepresentation is one made carelessly or without reasonable grounds for
believing it to be true. But it cannot be regarded unless the representer owed a duty to the
representee to be careful. The same above statement was given in the case DERRY vs.
PEEK10.

INNOCENT MISREPRESENTATION:-
The term innocent misrepresentation is used for the misrepresentation in which no element of
fraud or negligence is found or one for which the representee has good grounds of belief.

In MACKENIZE vs. ROYAL BANK OF CANADA11, a married woman stood guarantee

given by her for the indebtedness of the company in which her husband was the principal
shareholder. Before she stood guarantee, she was assured by her husband and the bank
manager that her shares were bound to the bank and they had gone anyhow and the only
chance of getting them back was if she signed the guarantee. There was a subsequent renewal
of the guarantee before the plaintiff was advised of the true facts. The contract of guarantee
was held liable to be avoided as induced by material misrepresentation even if innocently
made. The mere fact that the party making the representation has treated the contract as
binding and had acted on it didn’t preclude relief nor could it be said that the plaintiff
received anything under the contract which she was unable to restore.

In ORIENTAL BANK CORPORATION vs. JOHN FLEMING12, Sargent J. observed:

9 A.I.R. 1998 Ker. 171(https://indiankanoon.org/doc/1680063/)

10 (1889) 14 A.C. 337. (https://en.wikipedia.org/wiki/Derry_v_Peek )
11(1934)A.C.468LordAtkinat475
(https://www.casemine.com/judgement/uk/5b2897ce2c94e06b9e19b644)
12 (1879) ILR 3 Bom 242 at 267 (https://www.lawkaranconsultancy.in/oriental-bank-
corporation-vs-john-fleming/)
 P a g e | 11

The second clause of s. 18 is probably intended to meet all those cases which are called in the
courts of enquiry, perhaps unfortunately so, cases of ‘constructed fraud’, in which there is no
intention to deceive, but where the circumstances are such as to make the party who derives a
benefit from the transaction equally answerable in effect as if he had been actuated by
motives of fraud or deceit.

In RE NURSEY SPINNING AND WEAVING13, two directors, a secretary, a treasurer and

an agent of the company signed a bill of exchange in the form in which the company would
not be liable. The bill was sold to the bank. It was held that the company would not have been
liable as a drawer. The decision proceeded on the ground that the directors, while acting
within the scope of the authority, had sold the bill as one on which the company was liable,
but upon which, having regard to the form in which it was drawn, the company could not be
rendered liable, and the directors were, therefore, guilty of misrepresentation within the
meaning of the present sub section.

DAMAGES FOR MISREPRESENTATION

Damages have always been recoverable under the English law for fraudulent
misrepresentation and are recoverable for negligent misrepresentation under 2(1) of the
Misrepresentation Act, 1967. Under this act, such compensation can be awarded in lieu of
performance under section 19 as would place the representee in a position as if the contract
were performed. The court granting rescission has also the power to order compensation
under section 30 of the Special Relief Act, 1963. The person rescinding the contract would
also be entitled to restitution to the extent provided in section 65.

13 (1881) 5 Bom 92 but referred from (https://www.coursehero.com/file/p157ucla/Now-the-

elements-of-an-actionable-misrepresentation-are-well-settled-They-are/)
 P a g e | 12

Difference Between Fraud and Misrepresentation

1. The basic difference between misrepresentation and fraud is that in fraud the person
making the representation does not himself believe in the truth of the statement he is
making whereas in situations of innocent misrepresentation the person making the
statement may believe that what he is saying is true. This is due to the fact that the
person making the statement is simply repeating what another person has asserted to
be true. In cases of fraud, the person making the statement is a complete liar and is
making the statement to deceive others to enter into a contract. However, this is just
the general rule.

2. Difference between fraud and misinterpretation: ‘Fraud’ means a willful

misrepresentation of a material fact while ‘Misrepresentation’ means a bonafide
representation which is false. In misrepresentation, the person making the false
statement believes it to be true. In fraud, a false statement is a person who knows that
it is false or he does not care to know whether it is true or false.

3. A deceptive act done intentionally by one party in order to influence the other party to
enter into the contract is known as Fraud. The representation of a misstatement, made
innocently, which persuades other parties to enter into the contract, is known as
misrepresentation.

4. There is no intention to deceive the other party when there a misrepresentation of fact.
The very purpose of the fraud is to deceive the other party to the contract.

5. Misrepresentation renders the contract voidable at the option of the party whose
consent was obtained by misrepresentation. In the case of fraud, the contract is
voidable, it also gives rise to independent action in tort for damages.

6. Misrepresentation is not an offense under Indian penal code and hence not punishable.
Fraud, in certain cases, is a punishable offense under Indian penal code.
 P a g e | 13

7. Generally, silence is not fraud except where there is a duty to speak or the relations
between parties is fiduciary. Under no circumstances can silence be considered as
misrepresentation.

8. The party complaining of misrepresentation can’t avoid the contract if he had the
means to discover the truth with ordinary diligence. But in the case of fraud, the party
making a false statement cannot say that the other party had the means to discover the
truth with ordinary diligence.

Conclusion
The acts done fraudulently are civil wrong and hence the party doing it can be
sued in court by the aggrieved party even if the aggrieved party has a means of
discovering the truth in the normal course of action. Misrepresentation is not a
civil wrong as the party making the wrong representation honestly have no idea
about the actual truth and so the aggrieved party cannot sue the other party in
court but it has the option to rescind the contract.

Hence, there is an absence of free consent in both the conditions whether it is

fraud or misrepresentation that is why the contract is voidable at the option of
the party whose consent was so caused.