Detailed Presentation on Fraud in Contract Made By: Edited By: Ayush Patria, Sangam University, Bhilwara Follow us on Instagram: @law_laboratory Website: www.lawlaboratory.com

1. FRAUD IN CONTRACT

2. DEFINITION OF FRAUD
• It is defined under Section 17 of The Indian Contract Act, 1872.
• Fraud implies and involves any of the following acts committed by a
contracting party or his connivance or his agent with the intention of
deceiving or inciting another party or his agent to enter into the
agreement.

3. • The parties have no duty to speak about facts likely to affect the consent of
the other party to the contract, and mere silence does not amount to fraud
unless the circumstance of the case shows that there is a duty to speak or
silence equivalent to speech.
• For ex - A sells by auction to B a dog, which A knows to be unsound, A
says nothing to B about the dog’s unsoundness. This is not fraud in A.

4. INGREDIENTS OF SECTION 17
Following are the ingredients of Section 17 of The Indian Contract Act,
1872:
(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;

5. 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.

6. FRAUD AND MISREPRESENTATION
• The main difference is that in the FRAUD the person suggesting does not
believe it to be true.
• And in the other case i.e., MISREPRESENATATION he believes it is true.
• Although in both FRAUD and MISREPRESENTATION, it is a
misrepresentation of fact(s) that misleads the promise as against the
promisor.

7. • Common law says, fraud will render the contract voidable at the
option of the party whose consent is so obtained, and it will also
give rise to an action for damages in respect of fraud.
• Fraud is a conduct either by letter or by words.

8. REPRESENTATION
• Representation is a statement of fact, past/present and is distinct
from an opinion statement
• Although in certain circumstances, a statement of opinion may be
considered as a statement of fact.

9. • The misrepresentation that is fraudulent must be material in order
to allow the representative to prevent the agreement.
• It would have affected a reasonable/prudent man in choosing
whether to enter into the agreement or not.

10. • Lillykutty vs. Scrutiny Committee AIR 2005 SC 4313 Case -
Here, a false certificate was obtained in order to take unfair
advantage. It was held that fraud vitiates every solemn act.
CASE LAW

11. • Fraudulent acts are not encouraged by the courts.
• Any action by the authorities or by the people claiming a
right/privilege under the Constitution of India which subverts
the constitutional purpose must be treated as a fraud on the
Constitution.

12. FALSE ASSERTION WITHOUT BELIEF IN ITS TRUTH
• In order to prove fraud, it must be proved that according to the
knowledge of the party, representations made were false. The
statement must be false in substance and in fact. Positive
knowledge of falsehood is not a sole criteria.

13. • Even mere ignorance as to the truth or falsehood of material
assertion, which, however, turns out to be untrue, is deemed
equivalent to the knowledge of its untruth, as also where the
representator suspected that his statement might be inaccurate, or
that he neglected to inquire into its accuracy.

14. CASE LAW
• Jewson & Sons Ltd v Arcos Ltd (1933) 47 Ll.L.Rep. 93 Case. It
was held as follows:
• Giving a false impression and inducing a person to act upon it,
was considered fraud,
• Even if each fact taken by itself would be literally true.

15. RECKLESS STATEMENTS
• Proof of nonattendance of genuine and legitimate conviction is all that is
important to fulfil the presence of fraud, regardless of whether the
misrepresentation is made recklessly or purposely;
• Lack of concern or carelessness with respect to the represented as to truth
or deception of the misrepresentation bears only an instance of
nonappearance of such conviction.

16. • Articulations made without confidence would incorporate
explanations made carelessly. Misrepresentation as to title made
by sellers wildly or with gross negligence can't get away from
the charge of false/fraudulent misrepresentation.

17. AMBIGUOUS STATEMENTS
• Where the representor makes an ambiguous statement, the person to whom
a representor makes an ambiguous statement must prove that he understood
that statement in the sense that it was in fact false.
• The representor will be guilty of fraud if he intended the statement to be
understood in that sense, and not if he honestly believes it to be true, but
the person relying on it understands it in a different sense.

18. • Once it is held that the representation was fraudulent under this
clause, the exception in section 19 is of no avail, and the
question whether the person alleging fraud had or had not the
means of discovering the truth with ordinary diligence, is
immaterial.

19. ACTIVE CONCEALMENT
• Mere non-disclosure of some immaterial fact(s) would not per se five a right to
termination unless it is further found that the consent has been secured by practicing
some trickery.
• Where the seller sold property already sold by him to a third person, his conduct
amounted to active concealment and fraud, and the buyer could recover the price despite
the agreement that the seller could not be responsible for a defect in title.

20. PROMISE WITHOUT AN INTENTION OF PERFORMING IT
• Under English Law, making a promise without an intention of performing is not fraud.
• To bring a case under this Section, it must be shown that the promisor had no intention
of performing the promise at the time of making it.
• And any subsequent conduct or representation is not considered for this purpose.

21. SILENCE AS FRAUD
• Silence about facts is not fraud per se.
• Unless there is an obligation to speak or if it is equal to
expression, mere silence does not amount to fraud.
• This rule has two prerequisites:

22. ~~ Firstly, suppressing portion of the known facts may mislead the assertion of the
remainder, although literally true as far as it goes. In such a case, the declaration is
substantially incorrect, and fraudulent is the willing rejection that makes it so.
~~ Secondly, commercial use may impose an obligation to disclose specific flaws in
products sold or the like. In such a situation, failure to mention such a defect is equal to
a statement that there is no such defect.

23. DUTY TO SPEAK
• The party is under no duty to disclose facts that are or might be
equally within the means of knowledge of both the parties.
CASE LAW
• Bell v Lever Bros [1932] AC 161

24. It was held that the company agreed to pay large compensation to two
employees, the subsidiary company directors, whose services were being
dispensed with. After paying the money, the company discovered that the
directors had committed breaches of duty, which would have justified their
dismissal without compensation. The House of Lords held that the directors
had not these breaches in mind and were under no duty to disclose them.

25. NO FRAUD
• If the party had the facts before it and is alleging based on it or
had the means to know them, it could not be said to have been
defrauded, even if a false statement has been made. Further, a
contract cannot be merely on a trivial and inconsequential mis-
statement or non-disclosure.

26. CASE LAW
In Janakiamma v Raveendra Menon AIR 1981 Ker 205, where the
plaintiff was aware of the contents of the Will of her father, the
partition of property on the death of the father and mother was not
set aside on the ground of fraud of not disclosing the contents of
the Will; and no fresh partition was ordered.

27. EVIDENCE AND BURDEN OF PROOF
• In number of cases, fraud is not capable of being established by positive
and tangible proof. It is by its very nature secret in its movements.
• It is, therefore, sufficient if the evidence given is such as ay lead to
interference that fraud must have been committed. In most cases,

28. circumstantial evidence is the only resource in dealing with
questions of fraud.
• If this were not allowed, the ends of justice would be constantly,
if not invariably, defeated. At the same time, the interference of
fraud is to be drawn only upon an intentional wrongdoer.

29. EFFECT OF FRAUD
• A contract, consent to which is obtained by fraud, is voidable under
section 19.
• The party deceived has the option to affirm the contract and insist that he
be put in the position in which he would have been if the representations
were true, or he may rescind the contract to the extent it is not performed.

30. • Upon rescission, he is liable to restore the benefit received by him under
section 64 and may recover damages. The measure of damages
recoverable is essentially that applicable to the tort deceit, i.e., all the
actual loss directly flowing from the transaction included by the fraud,
including the heads of consequential loss, and not merely the loss which
was reasonably foreseeable.

31. DAMAGES FOR FRAUD
• In Indranath Banerjee vs. Rooke, where a contract is induced by
fraud, the representee is entitled to claim rescission, or damages
or both. He would have a remedy by way of such suit, even if
restitutio in integrum is not possible.

32. Principles applicable in asserting damages for fraudulent
misrepresentation
1) The defendant is bound to make reparation for all the damage directly
flowing from the transaction;
2) Although such damage not have been foreseeable it must have been
directly caused by the transaction;

33. 3) In assessing search damage, the plaintiff is entitled to recover by way
of damages the full prize faced by him, but he must give credit for any
benefits which he has received as a result of the transaction;
4) As a rule, the benefits received by him into the market value of the
property acquired at the date of the transaction, but the general rule

34. is not to be inflexible applied where to do so would prevent him from
obtaining full compensation for the wrong suffered;
5) The plaintiff is entitled to recover consequential losses caused by the
transaction;
6) The plaintiff must take all reasonable steps to mitigate the loss once
he has discovered the fraud.