Fraud

Intentional misrepresentation of facts, speaking broadly is called “fraud”.

According to Section 17:
17. “Fraud” defined – “fraud” means and includes any of the following 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 is to facts likely to affect the willingness of a person to
enter into a contract is not fraud, unless the circumstances of the cases such that,
regard being had to them, it is the duty of a person keeping silence to speak,
unless his silence is, in itself, equivalent to speech.
Illustrations:
(a) 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.
(b) B is A’s daughter, and has just come of age. Here, the relation between the
parties would make it A’s duty to tell B if the horse is unsound.
(c) B says to A – “If you do not deny it, I shall assume that the horse is sound”.
A says nothing. Here A’s silence is equivalent to speech.
(d) 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.

1. Assertion of facts without belief in truth

 To constitute fraudulent act, the suggestion or statement made must be of
fact, it must be false and person making it does not believe it to be true or
knows that it is false or doesn’t have faith in its truth.
If the statement made is not of fact, but of law it will not amount of fraud.
In a landmark case of Derry v Peek, 1889, Lord Herschell said: “ fraud is
proved when it is shown that a false representation has been made, -
a) Knowingly, or
b) Without belief in its truth, or
c) Recklessly careless whether it be true or false.”

In this case, a company’s prospectus contained a representation that the

company had been authorised by special act of Parliament to run trams by steam
or mechanical power. The authority to use steam was, in fact, subject to the
approval of the board of trade, but no mention was made to this. The board
refused consent and consequently the company was wound up. The plaintiff,
having bought some shares, sued the directors for fraud. But they were held not
liable.
They were not guilty or fraud as they honestly believed that once the Parliament
has authorised the use of steam, the consent of the board was practically
concluded. It follows, therefore, that the person making a false representation is
not guilty of fraud if he honestly believes in its truth. Does intentional miss
representation is of the essence of fraud.
2.Active concealment
Active concealment is something different from passive concealment. Passive
concealment means my silence is to material facts. An active concealment of a
material fact is a fraud.
The expression “any other act fitted to deceive” naturally means any app which is
done with the obvious intention of committing fraud. For example, husband
persuaded his illiterate wife to sign certain documents telling her that by them he
was going to mortgage her to lands to secure his indebtedness and in fact
mortgaged four lands belonging to her.
Another example, where the seller of property did not disclose to the Buyer
pending litigation about the property, the Buyer was allowed refund of his money
with six percent interest.
Mere silence
Ordinarily, mere silence is no fraud, even if its results to conceal “facts likely to
affect the willingness of a person to enter into a contract.” A contracting party is
under no obligation to disclose the whole truth to the other party or to give him
the whole information in this possession affecting the subject matter of the
contract. It is under this principle that a trader may keep silent about a change in
prices. A seller who puts forth an unsound horse for sale, but says nothing about
its quality, commits no fraud.
In the case of Shri Krishnan v Kurukshetra University, 1976, a candidate, who had
full knowledge of the fact that he was short of attendance, did not mention this
fact in the examination form. This was hell to be no fraud, it being the duty of the
university to scrutinize forms and to call for verification on information in case of
doubts. The university having failed to do so, was estopped from cancelling the
examination of the candidate.
A House was let out for 3 years without disclosing to the tenant that it was in such
a ruinous and dangerous state to be dangerous to occupy, a fact in the landlords
knowledge. When the tenant discovered this fact he applied to have the contract
set aside, arguing that the landlord should have disclosed the real state of the
house. The court didn’t allow the relief. There was no warranty that the house
was fit for immediate occupation. No representation was made, since there was
no obligation on the owner to say anything about the state of the house.
When silence is fraud
Silence may become deceptive in certain cases.
A.Duty to Speak (Contracts of uberrima fides)
Duty to speak arises where one contracting party reposes trust and confidence in
the other. A father, for example, selling a horse to his son must tell him if the
Horse is unsound, as the son is likely to rely upon his father.
Duty to speak also arises where one of the parties is utterly without any means of
discovering the truth and has to depend on the good sense of the other party. For
example, and Insurance Company knows nothing about the life of circumstances
of the assured. It is, therefore, the duty of the assured to put the insurer in
possession of all the material facts affecting the risks covered. A contract of
insurance is, for this reason, called a contract of absolute good faith.
Burden of proof lies on the insurance so that the fact misstated or suppressed
was of material nature and to the risks covered and that the same time was done
to cause misconception about the risk undertaken by the insurers.
In the absence of any such relationship there is no duty to speak and mere silence
even if it amounts to misrepresentation will be no fraud.
For example, in the case of Haji Ahmad Yarkhan v Abdul Gani Khan, 1937, the
plaintiff spent a sum of money to mark the engagement of his son. He then
discovered that the girl suffered from epileptic fits and so broke off the
engagement. He sued the other party to recover from them compensation for the
loss which he had suffered on account of the deliberate suppression of vital fact
which amounted to fraud.
B.Where silence is Deceptive
Silence is sometimes itself equivalent to speech. A person who keep silent,
knowing that his silence is going to be deceptive, is known as guilty of fraud.
Where, for example, the Buyer knows more about the value of the property,
which is a subject of sale, but prefers to keep the information from the seller, the
latter may void the sale.
C.Change of Circumstances
Sometimes a representation is true when made, but, it may, on account of a
change of circumstances, become false when it is actually acted upon by the
other party. In such circumstances, it is the duty of the person who made the
Representation to communicate the change of circumstances.
For example, in the English case of With v. O’Flanagan, 1936, medical practitioner
represented to the plaintiff that his practice was worth €2,000 a year. The
Representation was true. But 5 months later when the plaintiff actually bought
the practice, it had considerable gone down on account of the defendant’s
serious illness. It was held that the change of circumstances ought to have been
communicated.
D.Half-truths
Even when a person is under no duty to disclose a fact, he may become guilty of
fraud by non disclosure if he voluntary discloses something and then stops half
the way. A person may keep silence, but if he Speaks, a duty arises to disclose the
whole truth.
For example, in a US case of Junius Construction Corporation v. Cohen, 1931, the
plaintiff purchased a tract of land. The contract of sale stated that the land was
subjected to right of the borough to open two streets within the area. But as a
matter of fact the borough had the right to open 3 Streets.
Holding that the plaintiff had the right of rescission, Chief Justice said: “ we do not
say that the seller was under a duty to mention the projected streets at all. That
question is not here. What we say is merely this, that having undertaken or
professed to mention them, he could not fairy stop Halfway.”
3.Promise made without intention of performing
This is the third type of fraud included in the definition in section 17. To tie-up a
person to a promise with no intention of performing from one’s side and with the
intention of only preventing the other from dealing with the others, is an example
of a promise made without the intention of performing it.
A purchase of goods without any intention of paying the price is a fraud of this
species.
4.Any other act fitted to deceive
The Fourth Kind of fraud identified by section 17 is any act which is fitted to
deceive.
In a case before the Calcutta High Court where a practitioner cast aspersions on
the court and also on the opposite lawyer, the court cited generally the following
statement about the concept of fraud: fraud has been defined in section 17 of the
Contract Act, 1872. As per interpretation of the statute, two kinds of fraud are
mentioned, firstly actual of positive fraud which includes cases of intentional and
successful employment of any cunning, deception, or artifice, used to circumvent,
cheat or receive another and secondly, constructive or legal fraud which include
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.
5.Any act or omission specially declared to be fraudulent
The last category i.e. fifth kind of fraud includes cases in which the law specially
declares an act or omission to be fraudulent. For example, the insolvency act and
companies act declare certain kinds of transfer to be “fraudulent preference”.
The fifth and the last category of frauds included in the definition of section 17 is
intended to cover all such acts which under any branch of law are regarded as
fraudulent. In solvency law there is, for example, the concept of fraudulent
preference and in the Transfer of Property Act, there is the concept of fraudulent
transfer.
Essentials of a fraud
1. An intention to deceive
2. Use of unfair means
3. Deliberate concealment of material facts
4. Abused position of confidence

Fraud in terms of insurance policy

Where the insured willfully gives answers which are untrue with a view to obtain
from them the policy of the Insurance of his life, they are in the nature of fraud.
For the avoidance of policy, the following three conditions should be followed:
A. The statement made by the insured must be on the material matter or
must suppress facts which were material to disclose.
B. The suppression must be fraudulent.
C. The insured must have known at the time of making the statement.

Difference between Fraud and Misrepresentation

Misrepresentation and fraud have many points in common. For instance, both
render the contract voidable; there is a false representation in both; in either case
it is necessary that the consent should have been caused by the fraud and
misrepresentation and finally, where there is a fraud by silence, the fact, that the
means of discovering the truth by ordinary diligence, is a good defence. Yet, there
are some differences which are noticeable:

FRAUD
1. Fraud is more or less an
intentional wrong.
2. Fraud, in addition to
rendering the contract voidable,
is a cause of action in tort for
damages.
3. Accepting fraud by silence, it
does not lie in the mouth of the
person committing fraud to say
that this victim was too easily
deceived or had the means of
discovering the truth.
MISREPRESENTATION
1. Misrepresentation may be
quite innocent.
2. Simple misrepresentation is not
a tort but under section 75 of the
contract act, a person who
rightfully is rescinds a contract is
entitled to compensation for any
damage which he has sustained
through the non fulfillment of the
contract. It also enables the court
to award damages instead of
rescission.
3. A person complaining of
Misrepresentation can be met
with the defence that he had “the
means of discovering the truth
with ordinary diligence.
The principal difference between fraud and misrepresentation is that in one case
the person is making the suggestion does not believe it to be true, though in both
the cases it is misrepresentation of the facts.