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Fraud: Meaning, Cases and Effects

Last Updated : 09 Feb, 2024
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Fraud means deceiving one of the parties to the contract deliberately by making false statements and claims. Under fraud, one party, having full knowledge, misrepresents the other party by stating facts and figures that are not true or by making claims recklessly without checking for trueness; which affects the free consent of the other party. Fraud is done when one of the parties convinces another to enter into an agreement by making untrue statements and suggesting a fact that is not true, even when the other party does not believe it to be true.

Geeky Takeaways:

  • Fraud means deceiving one of the parties to the contract deliberately by making false statements and claims.
  • Fraud impairs the consent of the party.
  • Fraud is done when one of the parties convinces another to enter into an agreement by making untrue statements.
  • A false statement, to amount to fraud, must be based on facts and not personal opinions.

Fraud under Indian Contract Act, 1872

What is Fraud?

Fraud means any sort of act committed by one of the parties to a contract, or with his partner, or by his agent, done with the intention to deceive another party to the contract or his agent, or to induce him to enter into the contract by such deception against his own will. For such deception to be proved as fraud, the aggrieved party who has been deceived to enter the contract should suffer from any actual loss due to the act of deception by the other party, which evidences fraud. It is worth noting that there can be no case or claim of fraud where the aggrieved party has incurred no damage or loss. Also, the false statement must be made of facts, not merely of personal opinions.

It is to be noted that mere silence regarding facts that could exert any effect on a person’s willingness to enter into a contract does not amount to fraud under the Indian Contract Act; however, if the circumstances of the case impose a duty on a party to disclose those facts or if the silence itself is equivalent to speech.

For example, Anil contracts with Rahul to supply him with 100 new laptops. However, Anil had a dead stock of 100 laptops that were refurbished and second-hand. Even after knowing that the laptops were refurbished, he sent those 100 laptops to Rahul instead of buying new ones. This is a case of fraud committed by Anil.

According to Section 17, 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 or to induce another party thereto or his agent, to enter into the contract:

1. The Representation that a Fact is True when it is Not True by one who does not Believe it to be True:

Representation is a statement of fact, past or present. Representation is distinct from an opinion statement; however, a statement of opinion may be considered a statement of fact in certain cases. The fraudulent misrepresentation must be material in order for such representation to lead to entering the contract on the basis of such wrong representation; i.e., it would have affected a party in choosing whether to enter into the agreement or not.

2. The Active Concealment of a Fact by a Person who has Knowledge or Belief in the Fact:

When one of the parties is aware of the facts of the case and he possesses knowledge about some material defect that should be made aware to the other party with whom he is dealing but does not share material information as collateral to the contract, this would amount to fraud. Here, the party intentionally hides the facts or information about the subject matter. However, mere non-disclosure of some immaterial information would not give the aggrieved party a right to rescind unless it is found that the consent has been secured by practicing some deception by the other party. Remedies shall be available to the aggrieved party only in the case where he has suffered some damage or loss, and that loss should have happened due to the concealment of such material information.

3. A Promise made without any Intention of Performing it:

A promise made without the intention of performing it amounts to fraud. In this case, the promise is made with the sole objective of preventing the other party from dealing with or entering into a contract with the other party. However, it must be shown that the promisor had no intention of performing the contract at the time of making it, and subsequent representation is not considered in this case. Here, the motive of the other party is to mislead by making a fake promise of performing it.

4. Any other Act Fitted to Deceive:

Where one party has performed any act or, through his act, it can be implied that his sole purpose is to deceive the other party to the contract and gain an unjust advantage by just deception, such acts are classified under this case. This provision is a general rule in nature and is intended to include all other means of acts or unfair means intended to deceive anyone other than those stated above. In this case, any such acts will amount to fraud.

5. Any such Act or Omission as the Law Specifically Declares to be Fraudulent:

This case includes any such acts or omissions that are specially declared to be fraudulent. This provision is made to include all other possible means and ways of tricking or deceiving any of the parties. This is made to cover all sorts of intentional trickery and leave none. If we take the case of the Transfer of Property Act 1882, under Section 55, the act has made it compulsory for the seller of immovable property to disclose all material latent defects in the property to the buyer. Not following the provisions of this section will amount to fraud.

Does Silence amount to Fraud?

As established by the Indian Contract Act 1872, mere silence does not amount to fraud. As per Section 17 of the Indian Contract Act 1872, a contract influenced by fraud is voidable at the option of the aggrieved party. However, to avail the remedy of a contract being declared voidable due to fraud, the aggrieved party must show that a false representation was made with the intent to deceive the party and that such deception has led to damage or loss to the aggrieved party. It is worth noting that a failure to disclose information or a mere silence will not be considered fraud under the Indian Contract Act 1872. However, if the circumstances of the case make it necessary for the party to keep silent to speak, or unless his silence in itself is equivalent to speech, fraud can be considered. There are exceptions where silence or false representation is not considered a fraudulent act if the party could have discovered the facts through reasonable care. The principles of Caveat Emptor shall be followed.

Effect of Fraud

Section 19 of the Indian Contract Act establishes the legal effects of fraud in a contract where the consent of one of the parties to the contract was obtained through fraud. In such a case, the contract will be voidable at the option of the aggrieved party; i.e., the affected party can either choose to rescind the contract to the extent that it has not been performed or he can choose to affirm the contract and seek remedies available under the law.

Conclusion

Fraud means deceiving one of the parties to the contract deliberately by making false statements and claims. Under fraud, one party, having full knowledge, misrepresents the other party by stating facts and figures that are not true or by making claims recklessly without checking for truth; which affects the free consent of the other party. The Indian Contract Act has established certain cases that shall be considered fraud: 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 in 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. Section 19 of the Indian Contract Act establishes the legal effects of fraud in a contract where the consent of one of the parties to the contract was obtained through fraud. In such a case, the contract will be voidable at the option of the aggrieved party.

Frequently Asked Questions (FAQs)

1. What is Fraud?

Answer:

Fraud means any sort of act committed by one of the parties to a contract, or with his partner, or by his agent, done with the intention to deceive another party to the contract or his agent, or to induce him to enter into the contract by such deception against his own will.

2. What cases are considered as Fraud?

Answer:

The following are considered fraud:

  • 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 in 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.

3. What is the effect of Fraud?

Answer:

Section 19 of the Indian Contract Act establishes the legal effects of fraud in a contract where the consent of one of the parties to the contract was obtained through fraud. In such a case, the contract will be voidable at the option of the aggrieved party.

4. Does silence amount to Fraud?

Answer:

As established by the Indian Contract Act, 1872, mere silence does not amount to fraud. As per Section 17 of the Indian Contract Act, 1872, a contract influenced by fraud is voidable at the option of the aggrieved party. However, in order to avail of the remedy of a contract being declared voidable due to fraud, the aggrieved party must show that a false representation was made with the intent to deceive the party and that such deception has led to damage or loss to the aggrieved party.

5. Mr. X contracted with Y, and during the contract, X tried to defraud Y, however, no actual loss happened to Y. Can Y sue X for fraud?

Answer:

In order for such deception to be proved as fraud, the aggrieved party who has been deceived to enter the contract should suffer from any actual loss due to the act of deception by the other party, which evidences fraud. It is worth noting that there can be no case or claim of fraud where the aggrieved party has incurred no damage or loss. So here Y can not sue X, as he has incurred no loss.



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