NATIONAL LAW UNIVERSITY ODISHA, CUTTACK

A PROJECT WORK ON CONTRACT LAW-I

TOPIC: CRITICALLY ANALYZE EMERGENCE RELEVANCE OF CONCEPT OF FRAUD

IN CONTRACT LAW

UNDER THE GUIDANCE OF:

(MS.) SHIVANI MAMGAIN

SUBMITTED BY:

VANSH KANCHAN (2022/BBA LLB/007)

VIGHNESH KUMAR SHARMA (2022/BBA LLB/054)

B.B.A. L.L. B | SEMESTER 2

BATCH 2022-2027
 TABLE OF CONTENTS

TABLE OF CONTENTS...........................................................................................................2
TABLE OF CASES...................................................................................................................3
INTRODUCTION...........................................................................................................................4
RESEARCH METHODOLOGY...............................................................................................4
CONTRACTS............................................................................................................................5
FRAUD IN INDIAN CONTRACT ACT 1872.........................................................................5
DIFFRENCE BETWEEN FRAUD AND MISREPRESENTATION.......................................7
EMERGING RELEVANCE OF FRAUD.................................................................................7
ECONOMIC LOSS RULE........................................................................................................8
APPLICATION OF ECONOMIC LOSS DOCTRINE TO FRAUD CLAIMS........................9
IMPORTANT CASES...............................................................................................................9
CONCLUSION........................................................................................................................10
BIBLIOGRAPHY....................................................................................................................10
 TABLE OF CASES

Bell v Lever Bros (1932) AC 161..............................................................................................8

John Minas Apcar v Louis Caird Malchus (1939) Cal 473.......................................................9
Khan Gull v. Lakha Singh [1928] 9 Lah 701.............................................................................8
Lillykutty v Scrutiny Committee [2005] 8 SCC 283...................................................................5
 INTRODUCTION

Fraud has been mentioned in Section 171 of the Indian Contract Act. It includes false
representation of material facts, or by non-disclosure of facts that should be known to both
the contracting parties. Fraud is guided by the principle of unethical gain of one party by the
loss of other. As the complexity in contracts increased, the instances of Fraud in contracts
have also increased. Different forms of Fraud have emerged in different type of Contracts.
Fraud is of infinite variety and that is why a definite explanation has not been provided, the
drafters have kept the interpretation open for the ages to come head to form up new types of
fraud. After the emergence of online form of contracts, the instances of frauds have increased
manyfold.

RESEARCH METHODOLOGY

For the purpose of analysing the intricacies of the project topic we have taken a descriptive
research approach. We relied on both primary and secondary resources, directly related to the
topic, using various articles, blog posts and even books to make our paper accurate.
Landmark judgments relevant to the topic have been cited to map a clearer picture of the
evolution of various subject matters of the topic. We used doctrinal research methodology
and tried to reach a conclusion by establishing the relationship of the research objectives with
the existing works

1
Indian Contract Act, 1872, S.17.
 CONTRACTS

Before we delve deep into the relevance of “fraud” in contract law, first it is pertinent to
know about certain terms of contract law to have a clear understanding of the topic. A
contract can be defined as “An agreement which can be enforced by law is a contract” 2. To
simplify it, for there to be a valid contract there has to be an offer, acceptance of that offer,
and consideration. The presence of these elements give rise to a valid offer. As far as the case
of voidable contract goes, they are “An agreement which is enforceable by law at the option
of one or more of the parties thereto, but not at the option of the other or others, is a voidable
contract”3. Voidable contracts basically have the elements of a contract present in them, but
they have a flaw which gives the liberty to one or more party to make it void. These contracts
can be enforced or cannot be enforced, dependent on the will of one party. Contract entered
under undue influence, fraud can be clubbed inside this head, as their enforceability is
dependent on one or more parties. As for the case of void agreements they are “An agreement
which cannot be enforced by law is said to be void” 4. They are not legally enforceable
because it misses one or more of the basic elements of a contract. For example: a contract
entered with a minor is considered to be “void ab initio”, which means that it is considered to
be void from the very beginning. In Indian Contract Act 1872, voidable contracts and void
agreements are defined from section 10 to 30. Fraud is also defined in section 17 of the said
act5.

FRAUD IN INDIAN CONTRACT ACT 1872

Fraud simply means “deception or cheating intended to result in personal or financial gain”.
However, we need to understand the definition of fraud given in Indian Contract Act to have
a clear understanding of what the terms means and what are the conditions in the given
section and its implications. According to section 176:

'Fraud is defined as any of the following acts carried performed by a party to a contract, or
with that party's knowledge, or by that party's agent, with the intention to mislead that party
2
Indian Contract Act, 1872, S.2(h).
3
Indian Contract Act, 1872, S.2(I).
4
Indian Contract Act, 1872, S.2(g).
5
Indian Contract Act, 1872, S.17.
6
ibid.
or his agent, or convincing that party 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; the active concealment of a
fact by one having knowledge or belief of 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.”

After analysing the section, following elements of a fraud can be separated out for analysis: -

1. To constitute fraud there must be a representation. Representation is not a statement of

opinion, but a statement of fact (past or present). For example: a false certificate
obtained by a person to take unfair advantage. It was held by the that fraud vitiates
every solemn act7
2. To constitute fraud, it is necessary to prove that the representations were not true to
the knowledge of the individual making them. Giving a false assertion and inducing a
person to act upon it constitutes fraud.
3. There must be active concealment of fact, mere non-disclosure does not amount to
fraud. It has to be proved that there was an active concealment of fact by a party and it
had an impact on consent given by a person.
4. When a person makes a promise without his intent to perform it constitutes fraud.
5. Silence as to facts that might affect a person's consent to enter into a contract does not
constitute fraud, unless the facts place an obligation on the individual to speak or his
silence is equivalent to speech. For example: - A and C enter into contract of sale of a
horse by A to C. A does not disclose the unsoundness of the horse to C, here the
silence of A does not amount to fraud although this could have affected the
willingness of C to enter into a contract. Another example: - A and C enter into a
contract of sale of a horse by A to C. C says to A that if he does not speak, he will
assume that the horse is of sound mind. A is silent. Here A’s silence was equivalent to
speech, so this silence would amount to fraud on part of A.

It has to be noted that fraud does not make a contract void but only voidable, in case of fraud
the party whose consent was obtained by the fraudulent act of another party has the option to
enforce the contract or not. The party can choose to enforce the performance of contractual
obligations of another party or can choose to rescind it and claim compensation for the loss
suffered by him.

7
Lillykutty v Scrutiny Committee [2005] 8 SCC 283.
 DIFFRENCE BETWEEN FRAUD AND MISREPRESENTATION

Although fraud and misrepresentation look similar, but there is an underlying difference
between them as the former is intentional deception of facts by one party in order to obtain
the consent of the other party while the latter is a representation of facts which is untrue but
the person making such representation believes it to be true. In misrepresentation, the
aggrieved party does not get a right to sue the other party making such representation while
in case of fraud the aggrieved party gets a right to sue the other party8.

EMERGING RELEVANCE OF FRAUD

With the development of society, different forms of contracts also came into existence which
stood as a cardinal pillar of the modern world. With the onset of these modern contracts,
problems related to these also emerged. The insurance contract which emerged as a modern
concept in the society, states that the contract is between two parties, i.e., the Insured and the
Insurer, where the insurer promises to indemnify the insured from the losses that are caused
by a particular event, on payment of ‘Premium’

Insurance has become an important component in the complex strategies for individual,
businesses, social groups etc. The insurance industry has grown worldwide importance and
the interdependence with other sectors of the society cannot be underestimated. With this
much worldwide recognition, there happen to have emerged instances of mishappenings in
the insurance sector. Insurance fraud has been around since the beginning of Insurance
recognition9. In the contract of insurance, at any given time the parties are called for to act in
utmost bona fide or with good faith towards one another, which eventually puts up an
obligation on the parties to disclose all the information to one another and to provide the
parties with correct information. The lack of good faith in insurance contract won’t imply as
Fraud in legal terms. In order to constitute Fraudulent activity on behalf of any of the
transacting party, there needs to be a material misrepresentation, an intent to deceive the
party and an aim to gain unauthorized profit. Commonly encountered functional
classification of Insurance claim are- Internal and External, usually insiders of the insurance
industry are considered as liable for committing internal frauds whereas external fraud is
8
Surbhi S, “Difference between Fraud and Misrepresentation” (2018) <https://keydifferences.com/difference-
between-fraud-and-misrepresentation.html>accessed on 14 March 2023.
9
Guido Dedene, “Insurance Fraud: Issue and Challenges”, (2004) https://www.jstor.org/stable/41953118 accessed
on 14 march 2023
committed by the outsiders of the industry such as policyholders. Soft insurance fraud often
referred as opportunity fraud, can be understood as the exaggeration of a legitimate claim and
the label ‘hard’ insurance fraud refers to carefully executed plans to rip off insurance. Fraud
develops with the development of business in the environment; it thrives on the dynamic
business environment. Fraud is the result of economic greed (motivation) and right
circumstances (opportunity), the most common motivation that has been found is economic
gain, there can also be other factors which play a role, but the main factor can be concluded
as economic gain. Fraud can take many forms in an insurance contract, in order to gain more,
policyholders may exaggerate the damages. Fraud in an Insurance Contract has serious
consequences on both the parties, for the policyholders it can lead to denial of rightful
coverage or the loss of policy and for the insurance company it can lead to financial losses.
Similar to Insurance contracts, partnerships contracts are also based on trust, it is based on
trust and mutual understanding. Elements of fraud, will usually invalidate the partnership
agreement. Fraud can even be found in the agreement itself. Partnership agreements are based
on trust and mutual understanding.

ECONOMIC LOSS RULE

Generally economic loss is defined as "losses other than those arising from an injury to the
plaintiff's body or other property". Economic loss is further classified into two distinct
groups: (a.) direct economic loss resulting from a difference between the promised value of
the product and the actual value supplied 10. For example: when the buyer recovers the value
to fulfil the loss, when the product was damaged. Various ways to cover direct economic loss
include getting the difference amount, getting the repair amount. Consequential or indirect
economic loss is a harm caused by a product defect that is external to the product and due to
the defect, such as lost profits from the product's incapacity to be used 11. Economic loss rule
is doctrine created developed by a California court in the case of Seely v. White Motor Co., in
this case plaintiff did not suffer any personal injury but sought damages for repair of truck,
loss occurred due to inability to use the truck, as the plaintiff did not suffer any personal
injuries it was held that the only remedy left to plaintiff was in the form of warranty. In
simple words economic loss rule is as follows: "Whenever a purchaser's expectations in a
transaction are frustrated because the product he bought are not functioning properly, his

10
R. Joseph Barton, “Drowning in a Sea of Contract: Application of the Economic Loss
Rule to Fraud and Negligent Misrepresentation Claims” (2000).
11
ibid.
recourse is said to be in contract alone, for he has incurred only 'economic' losses". The
economic loss rule prevents a dispute between contract and tort law.

APPLICATION OF ECONOMIC LOSS DOCTRINE TO FRAUD CLAIMS

The guideline for fraud and economic loss theory inherently come in conflict with each other.
On one hand fraud allows for the recovery of “purely economic loss” whereas on the other
hand economic loss rule prohibits the recovery of “purely economic loss” in the cases of tort
(when such a claim arises out of a contract). First approach to this can be fraud as an
exception to economic loss rule, as the chances of fraud claim being successful depends on
the conduct of the defendant, so clearly fraud allows for the claim of economic loss and will
be an exception to this rule. Another approach to this rule has been taken by a limited number
of US courts, where they have treated fraud as a tort and as economic loss rule bars from
recovery in tort so therefore fraud is no exception to this rule and prevents from recovery of
loss.

In case of Khan Gul v. Lakha Singh 12, the defendant, a minor fraudulently misrepresenting
himself as an adult, entered into a contract for the sale of his property. Plaintiff paid a certain
amount of money but the defendant refused to grant possession of the property. Here, as the
defendant being a minor, the contract was “void ab initio”, but the court held that a minor
acting fraudulently cannot be allowed to benefit from his act, so the court directed the minor
to back the money to plaintiff. The reason was to restore the economic position of plaintiff.
The rationale for such a decision was not expressly the application of “economic loss rule”
but it can be derived that the doctrine was applied to a extent in this case.

IMPORTANT CASES

There is no need to disclose those facts which might be within the knowledge of both the
parties, this was held in the Bell case13, where Mr Bell was the director of a company owned
by Lever. Mr Bell contradicted his contract by trading for his personal profit. Lever bros
terminated the contract, after paying the compensatory amount the company found out the
misconduct, committed by the employees. The court held that the directors were not under
any duty to disclose.

12
Khan Gull v. Lakha Singh [1928] 9 Lah 701.
13
Bell v Lever Bros (1932) AC 161
Mere silence will not result in Fraud14. A wanted to sell a property to B and in order to obtain
a high value from B, shows B fictitious letters from buyers which were actually fake, offering
high prices for the property of A. B believing it to be true enters into an agreement for a high
40 price. The contract is voidable at B instance for Fraud

CONCLUSION

Contracts are essential in navigating important business deals and even in day-to-day
conduct. With advancement of contracts, new ways to make contract void have also emerged.
Even in new forms of contract such as online contract or insurance contract, the element of
Fraud is still present. The economic loss rule present in the legal system mentions about the
protection of the consumer from fraudulent practices.

BIBLIOGRAPHY

1.Indian Contract Act, 1872, S.17.

2.Indian Contract Act, 1872, S.2(h).
3.Indian Contract Act, 1872, S.2(I).
4.Indian Contract Act, 1872, S.2(g).
5.Indian Contract Act, 1872, S.17.
6.ibid.
7.Lillykutty v Scrutiny Committee [2005] 8 SCC 283.
8.Surbhi S, “Difference between Fraud and Misrepresentation” (2018)
<https://keydifferences.com/difference-between-fraud-and-misrepresentation.html>accessed
on 14 March 2023.
9.Guido Dedene, “Insurance Fraud: Issue and Challenges”, (2004)
https://www.jstor.org/stable/41953118 accessed on 14 march 2023
10.R. Joseph Barton, “Drowning in a Sea of Contract: Application of the Economic Loss
Rule to Fraud and Negligent Misrepresentation Claims” (2000).
11.ibid.
12.R. Joseph Barton, “Drowning in a Sea of Contract: Application of the Economic Loss
Rule to Fraud and Negligent Misrepresentation Claims” (2000).

14
John Minas Apcar v Louis Caird Malchus (1939) Cal 473
13.ibid.

14.John Minas Apcar v Louis Caird Malchus (1939) Cal 473