What is Fraud as per Indian Contract Act 1872

Fraud is one of the grounds that can make a contract voidable or void under the Indian Contract Act, 1872. But what exactly is fraud and how is it different from other types of misrepresentation or deception? In this blog post, we will explore the definition, elements and consequences of fraud as per section 17 of the Indian Contract Act, 1872. In fact defination of fraud is rather vast and lengthy. Let's quote the section 17 of Indian Contract Act 1872.

Definition of Fraud

According to section 17 of the Indian Contract Act, 1872, fraud is defined as: 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.

The definition of fraud covers both positive acts and negative omissions that are intended to deceive or induce another party to enter into a contract. However, not every false statement or concealment amounts to fraud. There are certain elements that must be proved to establish fraud.

Analysis of section 17 of Indian Contract Act 1872

Under section 17 of the Indian Contract Act, 1872, fraud is defined as any act committed by a party to a contract, or with his connivance (willingness to allow), or by his agents, with the intention to deceive or trick the other party, his agent, or to induce him to enter into the contract.

Examples of Fraud

Fraud can take various forms, such as:

Suggesting a fact that is not true and that the person making the suggestion does not believe to be true. For example, A tells B that a certain plot of land belongs to him, when in fact it belongs to C, and induces B to buy it from him.
Actively concealing a fact that is material to the contract and that the person concealing it knows or believes to be true. For example, A sells a car to B without disclosing that the car has a major defect that affects its performance.
Making a promise without any intention of performing it. For example, A promises to deliver some goods to B within a week, but has no intention of doing so and plans to abscond with the money.
Doing any other act that is fitted to deceive. For example, A forges a document or uses a false identity to enter into a contract with B.
Doing or omitting to do anything that the law specially declares to be fraudulent. For example, A induces B to sign a contract by using undue influence, coercion, or misrepresentation.

Elements of Fraud

The essential elements of fraud are:

There must be a representation or suggestion of a fact or a promise made by one party to another.
The representation or suggestion must be false or untrue.
The party making the representation or suggestion must not believe it to be true or must have no intention of performing the promise.
The representation or suggestion must be made with the intention to deceive or induce another party to enter into the contract.
The other party must have been aggrieved or induced by the representation or suggestion and must have acted upon it.

If any of these elements are missing, there is no fraud. For example, if a party makes a false statement but believes it to be true, there is no fraud. Similarly, if a party makes a false statement but does not intend to deceive another party, there is no fraud. Likewise, if a party makes a false statement but the other party does not rely on it or act upon it, there is no fraud.

Consequences of Fraud

The consequences of fraud are:

The contract induced by fraud is voidable at the option of the party who was aggrieved. This means that the aggrieved party can either rescind (cancel) the contract or affirm (continue) it. However, if the aggrieved party affirms the contract after discovering the fraud, he cannot rescind it later.
The aggrieved party can also claim damages for any loss suffered due to the fraud. However, if he affirms the contract after discovering the fraud, he cannot claim damages for any subsequent loss.
The aggrieved party can also seek an injunction (a court order) to restrain the other party from doing anything that would harm his rights under the contract.

Does silence amounts to Fraud?

Mere silence about a fact that may affect the willingness of the other party to enter into a contract is not fraud, unless:

The circumstances of the case are such that it is the duty of the person keeping silent to speak. For example, A knows that B is about to buy a house from C, which is unsafe and likely to collapse. A has a duty to inform B about this fact, as he is B's friend and adviser.
The silence itself is equivalent to speech. For example, A and B are negotiating a contract, and A asks B whether there is any litigation pending on the subject matter of the contract. B remains silent, knowing that there is such litigation. B's silence amounts to fraud.

In fact defination of fraud itself provide some profound exlanation and examples where the silence will amount to fraud. Here we will examine the explanation under the section 17 of Indian Contract Act 1872.

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.

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 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.
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.
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. (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.

Case history on Nature and Effects of Fraud

Here are some examples of fraud in contracts based on judicial decisions:

Mithoolal Nayak v. Life Insurance Corporation of India (AIR 1962 SC 814): the Supreme Court held that if a person makes false statements in an insurance proposal form, it amounts to fraud and the insurance company can repudiate the policy.
Radhamani v. State of Kerala (2015 (6) KHC 1): the Kerala High Court held that if a person executes a settlement deed in favour of his children on the condition that they will provide him basic physical needs and later they fail to do so, he can revoke the deed on the ground of fraud.
Sri Gopalaiah v. State Bank of Mysore: the Karnataka High Court held that if a person obtains a loan from a bank by producing false documents and concealing material facts, it amounts to fraud and the bank can recover the loan by invoking the provisions of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.
P.L. Raju v Dr. Nandan Singh: A sold some land to B without disclosing that it was already acquired by the government under the Land Acquisition Act. This was held to be active concealment of a material fact by A amounting to fraud.
Rattan Lal Ahluwalia v Jai Janider Parshad: A induced B to enter into a partnership with him by falsely representing that he had a profitable business and showing him forged accounts. This was held to be fraud by A.
S.P. Chengalvaraya Naidu v Jagannath: A obtained a decree against B by producing false witnesses and documents in court. This was held to be fraud by A on both B and the court.
Pollock v Smith: A sold a horse to B by auction, knowing that it was unsound and suffering from a disease. A did not disclose this fact to B or anyone else. This was held to be fraud by A.

Conclusion

Fraud is a serious offence that can invalidate a contract and lead to legal consequences. Fraud involves any act done by a party to a contract or his agents with the intention to deceive or trick the other party or his agents or induce him to enter into the contract. Fraud can take various forms such as false suggestion, active concealment, false promise, deceptive act, or anything declared fraudulent by law. Mere silence about a fact is not fraud unless there is a duty to speak or silence is equivalent to speech. Fraud vitiates the consent of the party who is aggrieved or tricked and makes the contract voidable at his option. Fraud also gives rise to an action for damages in tort for deceit. The party who commits fraud is liable to compensate the other party for any injury or harm caused by his fraudulent act.