FRAUD UNDER INDIAN CONTRACT ACT, 1872
Fraud is a broad legal term that refers to intentional use of false or misleading information in an attempt to illegally deprive another person or entity of money, property, or legal rights. Fraud comes in many forms from many sources. One of the most common types of fraud is check fraud, the use of paper checks to commit fraud. Others are like Mail fraud Wire Fraud, Tax Fraud, Stock and securities Fraud, Medicare and Medicaid Fraud, etc. A fraudulent act should not be confused with a “hoax”—a deliberate deception or false statement made without any intention of gain or of materially damaging another person. A single fraudulent act may be prosecuted as both a criminal and civil offense.
Fraud defined under Indian Contract Act
‘Fraud’ means and includes any of the following acts committed by a party to a contract, or with his connivance, or by his agent1, 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; there should be SUGGESTIO FALSI or suggestion of falsehood.
- the active concealment of a fact by one having knowledge or belief of the fact; By active concealment of certain facts there is an effort to see that the other Party is not able to know or discover the truth. He is made to believe something is true whereas that is false. This is known as SUPPRESIO VERI or suppression off act purposefully.
- a promise made without any intention of performing it. According to Section 17(3) if there is no such intention to perform the contract, at the time when the contract was made, it amounts to fraud.
- any other act fitted to deceive; This provision is general in nature and is intended to include other means of trick and unfair means intended to deceive anyone other than by means of suggestio falsi, suppresio veri or a promise made without the intention to perform it. Under this Section, any such acts will amount to fraud.
- any such act or omission as the law specially declares to be fraudulent. For instance under the TP Act 1882, under Section 55, the seller of immovable property is bound to disclose to the buyer all material latent defects in the property. Not doing so will amount to fraud
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. E.g. 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.
NOTE: A contracting party is under no compulsion or obligation to point out the defects as to the subject matter of the contract to the other party. (In case of sale of goods, the rule which is applicable is caveat emptor – or the doctrine of ‘let the buyer beware’. It means that it is the duty of the buyer to be careful while purchasing the goods as there is no implied condition or warranty as to quality or fitness of goods.)
There are five essential elements of fraud:-
- A misrepresentation of a material fact:A false statement involving a material and pertinent fact must be made. The gravity of the false statement should be adequate to substantially affect the victim’s decisions and actions.
- Knowledge of falsehood:The party making the false statement must know or believe that it is untrue or incorrect.
- Intent to deceive:The false statement must have been made expressly with the intent of deceiving and influencing the victim.
- Reasonable reliance by the victim:The level to which the victim relies on the false statement must be reasonable in the eyes of the court. Reliance on rhetorical, outrageous, or clearly impossible statements or claims may not amount to “reasonable” reliance. However, persons known to be illiterate, incompetent, or otherwise mentally diminished may be awarded civil damages if the perpetrator knowingly took advantage of their condition.
- Actual loss or injury suffered:The victim suffered some actual loss as a direct result of their dependence on the false statement.
Statements of Opinion vs. Outright Lies: Not all false statements are legally fraudulent. Statements of opinion or belief, since they are not statements of fact, may not constitute fraud.
Consequences of Fraud (Section 19)
According to Section 19 where a consent to an agreement is caused by fraud , the agreement to a contract is voidable at the option of the party whose consent was so caused by fraud. Until such time it is avoided, the contract is valid.
The party defrauded has the following specific remedies –
- To rescind the contract
- To affirm it
- Rescind and claim for damages
- Enforce principle of restitution
- Sue for specific performance
If he chooses to rescind the contract he must do so within reasonable time. When the contract is rescinded it becomes void and unenforceable. However, if the party chooses, he may affirm it, then the question of rescinding the contract does not arise and the principle of estoppel will be revoked against him. Fraud is a tort. Thus, the aggrieved party can in a case of fraud , apart from rescinding the contract, can file a suit to claim damages. He may enforce the principle of restitution against the other party – under Section 64 of ICA. He may insist for a decree of specific performance of the contract minus the element of fraud.