Fraud in Contract Law

Fraud in Contract law is one of the factors that can cause the free consent for the agreement between two parties.

Relevant Provision:

Sections 17 and 19 of the Contract Act, 1872.

Meaning of Fraud:

Fraud means “a misrepresentation made recklessly by without belief in its truth to induce another person to act.”.

Definition of Fraud:

(i) “False statement or willful concealment of a material fact with intent to deceive another party is called fraud.”

(ii) According to Merriam-Webster Dictionary:

Fraud is defined as “Fraud is an intentional perversion of truth to induce another to part with something of value or to surrender a legal right.”

(iii) Fraud Under Section 17 of the Contract Act, 1872:

Fraud in a contract 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 a contract:

• (a) The suggestion as a fact of that which is not true by one who does not believe it to be true;
• (b) The active concealment of a fact by one having knowledge or belief of the fact;
• (c) A promise made without any intention of performing it;
• (d) Any other act fitted to deceive;
• (e) 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.

Ingredients of Section 17/Essential Elements of Fraud:

1. Act Committed with Intent to Deceive:

Fraud includes acts that are committed with intent to deceive i.e. to mislead somebody. It is committed by a party to the contract. It can also be committed through connivance or by an agent.

2. To Induce Somebody to Enter a Contract:

By fraud you make a person do what he would not have done otherwise. Fraud is committed to induce somebody to enter into a contract. Deceptively inducing somebody to enter into a contract would lead to his legal injury which is also considered fraud.

3. Suggestion of Fact:

To deceive or induce somebody to enter into a contract on a false belief. Fraud consists of an action in suppression of what was true and an action in representation of what was false. So a false statement as to a fact has to be made. It has to be false to the knowledge of the person making it. Thus intentionally either a true fact has to be suppressed or a false fact has to be presented.

4. Active Concealment:

It is fraud where a party to a contract actively conceals certain facts from the other party and the other party in ignorance of those facts enters into the contract. Active concealment is different from passive concealment. Passive concealment means mere silence as to material facts. Active concealment is done when the person has knowledge of a fact and also the effect of that fact on the contract if the other party comes to know of it. Thus active concealment is fraud.

Mere Silence is no Fraud:

Ordinarily, mere silence is not fraud even if its result is to conceal facts likely to affect the willingness of a person to enter into to 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 his possession affecting the subject matter of the contract. Under this principle a seller who puts forth an unsound horse for sale but says nothing about its quality, here silence is not considered fraud.

Cases where Silence is Fraud:

Following are the cases where silence amounts to fraud;

(i) Duty to Speak:

The duty to speak arises in relationships of trust and confidence. It arises when the other party’s trust and confidence are in the first party’s statements. It arises when the other party is acting without any means of discovering the truth but for the statements made by this party. In fiduciary relationships, a duty to speak exists.

(ii) Where Silence is Deceptive:

Sometimes silence amounts to speech. Therefore a person who keeps silent knowing that his silence is going to be deceptive is guilty of fraud.

Example:

A, the buyer knows more about the value of the property which is subject to sale. But he prefers to keep the information from the seller; the latter may avoid the contract.

(iii) Change of Circumstances:

Sometimes a representation when made is true but due to some change in circumstances becomes false when acted upon by the other party. In such cases, it is the duty of the person making representations to communicate such a change of circumstances.

(iv) Half Truths:

Under Section 17 of the Contract Act 1872, mere silence is no fraud.

A person who is under no duty to disclose a fact discloses half of it and does not mention the rest of it creates a duty to speak and if he does not do it, it amounts to fraud. “Everybody knows that sometimes half a truth is no better than a falsehood.”

(v) Promises Made without Intention to Perform:

Under Section 17(3) of the Contract Act 1872, it is fraud if a person ties up another in a promise only to prevent the other from forming other contracts. To bring the case within the boundaries of Section 17(3), it must be proved that the promisor had no intention of performing it.

Example:

‘A’ marries ‘B’ without any intention of regarding the marriage as real; it would be held that ‘B’s consent was taken under fraud.

(vi) Other Acts of Deception:

Section 17(4) of the Contract Act 1872, covers all acts of deception. All unfair ways of cheating are considered to be fraud.

According to Pollock and Mullah: “All kinds of intentional cheating are covered under fraud.” This subsection was inserted merely for the sake of abundant caution”.

(vii) Fraud by Act or Omission:

According to Section 17 of the Contract Act 1872, and Section 25 of the Pakistan Penal Code, the acts or omissions are the determining factors of the intention of a person. Where it is obligatory to disclose a fact an omission to do so would constitute fraud. It is a generic term embracing all multifarious means to get an advantage over another by false suggestion or by suppression of truth and includes all tricks, cunning, dissembling, and any unfair way by which another is cheated.

Effects of Fraud on an Agreement:

Under Section 19 of the Contract Act 1872, when the consent of an agreement is caused by coercion, fraud, or misrepresentation, the agreement is voidable at the option of the aggrieved party. Thus if fraud is committed the agreement is voidable at the option of the party who is aggrieved by such a promise.

(i) Aggrieved Party may insist on Performance:

If the aggrieved party thinks fit, he may insist on the performance of the contract.

(ii) Exception:

The contract is not voidable at the option of the aggrieved party if he had the means to discover the truth for himself with ordinary diligence.

Burden of Proving Fraud:

The burden of proof lies on the party who alleges that fraud had been committed against him. Fraud cannot be directly proved; it has to be inferred from the surrounding circumstances and conduct of the parties.

Frequently Asked Questions (FAQs):