Fraud
Fraud
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210 Chapter S Free Consent [S. 17]
A difficult question about this exception is that where a person bas the
means of discovering the truth, but does not use them and contracts in reli-
ance upon the statements made to him, whether the contract would be void-
able? In such cases the principle seems to be that if he relies upon those
means he cannot afterwards complain of the misrepresentation. But if he
does not use the means and relies upon the statements made to him, he can
.avoid. This :was laid down by the Court of Appeal in Redgrave v Hurd. u,
Here also a medical practice was under sale. The seller misrepresented. the
income which it produced, but gave: documents to the purchaser from which
he could have verified, but he did not do.so and having o.nly cuisorily looked
at them., purchased the business. On learning the truth he sought to avoid
the contract and was aUowed to do so. Sir GEORGE JESSEL MR remarked:
"If a man is indu~d to enter into a contract by false representation, it is not
sufficient answer to him to say: 'If you had used due diligence, you would
have found out that the report was untrue. You had the means afforded you
of discovering its falsity, which you did not choose to avail yourself of.' One
of the most familiar instances in modern times is this. Men issue a prospec-
tus containing false statements, and then say the contracts themselves may
be inspected at the office of the solicitors. It has always been held that those
who accept those false statements as true are .not deprived of their remedy
merely because they neglected to go and look.at the contracts themselves.
Another: instance with which we are familiar is a false -statement as to the
contents of a lease.; in such a ease as a man saying that there was no covenant
or provision in the lease to prevent the carrying on, in the house to be sold,
the trad!e which the purchaser was known by the vendor to be desirous of
carrying on therein. Although the lease itself might be produced at the sale
or might have been open to the inspection of the purchaser, it was held that
the vendor could not be allowed to say: 'You are not entitled to give credit
to my statement.' It is not sufficient, therefore, to say that a man has had the
opp.o rtu~ity of inve.stigating the real state of the case, but has not availed
himself'of that opportunity."
FRAUD
Defi.nitjon
Intentional misrepresentation of facts, speaking broadly is called "fraud".
According to Section 17:
s. 17.
•Fraud• defined. - •Fraudn means and includes ..ny of the following
acts committed by a party to a contract, or with his conn!va11ce, or by his agent,
by fraud or mi1repreienta:tion. Orie1ttal Insurance Co l.ttl " Gowrqmma, AIR JJIJl.4 K311t
2.9,. motor nhicle iruurance policy iuued tfier due verification about 1be ownership of..t he
veliide. Alter accident, .the: company was not allowed to take the plea thar the policy was
obtained by ml~repreacntarioo and that the claimant was not the owner of the vehicle.
136. (1881) LR 20 Ch..D 1.
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[S. 17)
Fraud
with lnte.n t to deceive another party thereto or his agent or to Induce him to
enter Into the contr act-
(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;
(3) a promise made without any intention of performing It
(4) any other act fitted to deceive;
(S) any such act or omission as the law specially declares to be fraudulent.
Explanation. -Mer e silence as to facts likely to affect the willingness of a per-
son 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 sllence Is, In itself, equivalent to speech.
Illustrations
(a) Asells, by auction, to 8, a horse which A knows to be unsound. A says nothing to 8 about
the horse's unsoundness. This Is not fraud In A.
(b) 8 Is A's daughter, and has ju.st come of age. Here, the re latIon between the parties would
make It A's duty to tell 8 if the horse l.s unsound.
(c) 8 says to A- "If you do not deny it, I shall assume that the horse Is sound•. A says noth-
ing. Here A's silence Is equivalent to speech.
(d) A and 8, being traders , enter upon a contract A has private lnformatlon of a change
in
prices which would affect B's wllllngness to proceed with the contract. A is not bound
to inform 8.
Active concealment
"Active concealment" is something different from mere "passive conceal-
ment".u' Passive concealment means mere silence as to material facts. An
active concealment of a material fact is a fraud; mere silence, excepting the
few cases noted below, does not amount to fraud. ·
The expression "any other act fitted to deceive" naturally means any act
which is done with the obvious intention of committing fraud . For example,
a husband persuaded bis illiterate wife to sign certain documents telling her
that by them he was going to mortgage her two lands to secu.re his indebt-
edness and in fact mortgaged four lands belonging to her. This was an act
done with the intention of deceiving ber.140 Where a person surrendered his
land to the State which was accepted after inquiry, but the land had already
been acquired under the Land Acquisition Act, it was held that the fact of
inquiry could not wipe out the consequence of fraud. The transaction of
surrender was a nullity. Where the seller of property did not disclose to the
buyer pending _litigation about the property, the buyer was allowed refund
of bis money with 6 per cent interest. 141
138. A.L. Mu1tane,r E.1tabl/1hm1nt v Varuna Ov11r11a1 (P) Ltd, (1998) 72 DLT 186, fraud
i1 a facer of dishonesty, fraud In connection with le1ter1 of credit. Santhaliwmar.i v
LaA,hmiammal, (2004) 2 CTC 2S9, a leuee in pouession and who had' pur up a building
also and had purchaaed rhe lessor'• intcre11 WH not allowed to say 1ba1 rhe leuor had made
fraudulent miarepre1en1arlon1. He could not recover back the money paid by him without
tceking cancellation of rhe 11le deed. ·
139. Gowrl,hankar v Joshi Amba Shankar Family Trult, (1996) 3 SCC 310: AIR 1996 SC 2202.
140. Ningawwa v Byrappa Shiddappa Hir1/tnrabar, AIR 1968 SC 9S6, 9S8: (1968) 2 SCR 797;
Vi11111swaran v Stat, , (2003) 6 SCC 73, Al R 2004 SC 1227 monrlu old pregnancy could not
have been concealed.. The defendant married ber, accepted the child and ,ome 4 years later
divorced her. Bound 10 pay maintenance. B.R. Chowdhury v Indian Oil Corpn Ltd, (2004)
2 SCC 177, concealment of rhe facr of previous employment under rhe Government for get-
ring dealcuhip, allowed to be terminated.
141. P.L. Raiu v Dr Nandan Singh, (2005) SALO 402,·
142. Aaron', R., efs v Twi11, 1896 AC 273,281 (HL).
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[S. 17] .
Fraud 21:
But the principle is not so confined. The duty to disclose the truth will arise
in all cases where one party reposes, and the other accepts, confidence. 147
Duty to speak also arises where one of the parties is utterly without any
means. of.discovering the truth and has to depend on the gO'od sense of the
other party. An insurance company, for example, knows nothing about the
life or circumstances of the assured. It has to depend on the disclosures
made by the assured. It is, therefore, the duty of the assured to put the
i11$urer in possession of all the material facts affecting the risk covered. A
contract of insurance is, for this reason, called a contract of absolute good
faith, uberrima fides. 1••· Where false answers as to the state of health were
given in a proposal for life insurance, the policy was held to be voidable and
it was not material that the medical officer of the co.rporation had c.~ ified
the life assured as good.14' Where a person got his motor vehicle insured in
the evening, when in the morning, the vehicle bad met with an accident, the
policy was held to be not enforceable, the duty of the ioswer to check the
vehicle notwithstanding.150 Burden of proof lies on the insurer to show that
the fact misstated or suppressed was of material nature to the risk covered
and that the same was done to cause misconceptio~ about the risk under-
taken by the insurer.u1
In the absence of any such relationship there is·no duty to speak and mere
silence even if it amounts to misr.epresentation, will be no fraud. For exam-
ple; in Haji Ahmad Yark.ban v Abdul Gani Khan:uz
The plaintiff spent a sum of money to mark the engagement of his son.
He then discovered that the girl suffered from epileptic fits and so broke
off the engagement. He sued the other party to recover from them com-
pensation for the loss which he had suffered on account o.£ their deliberate
.suppression of a vital fact which amounted to, fraud.
The court relied upon the decision of the House of Lords in Nocton v Lord
3
Ashburtonu where it was pointed out that a mere passive non-disclosure of
147. S•• for example, Nurs,y Spg 6- Wi,g Co Ltd, r•, TLR {1880) S '11om 92, Sri Al11m "N•UAiliru,
(1994) l Current lJ 32 (Malayaia); Snoj Aldrwol v LTC, (2004) 4 Clir ◄90 ijhar), positive
"No• answer wu given to the questfon of any u«tment·abour the state of heart the a.nswer
being false, tbe·claim failed. '
148, Se, Reuben Huson, The SP,e.cial Nature of the lnsuranc'I Co1t1ract: A ComP4rison of the
Ameriun and English Low of ln111ra1tc•, (1984) 47 Mod LR S23.
149. P. Sarojam v 1.1C, AIR 1986 Ker 201; P,J. Chacl,,o v LIC, AIR 2008 SC 42-4 non•disclosure
In insun_occ prop'osal that the iruurcd bad undergone o~ation .for ■ thyroid i~ma•
h~ld, polky voidable, the illJUn!<I was catoppcd from saying thai even if that fact bad ~
d1~lo1cd, II would not hne a!~ted the transaction.
1S0. G.o_rgr P. Vargi,.., v G. Doni,l, AIR 1998 Ker 120; Rajuh .Kwmar -Clioudhary v Un.it d
11
ln~,a T,i~un,nu Co Ltd, .(200S) 3 CCC 64 (Gau), non•disclosun: that an earlier proposal
of anaurancc for the 141mc propcny and on the same ground had been. refused by the ume
com~any, ~d •upprenlon ,o f material fact. The aubaequent in.urance waa obtained by sup•
prcmng tliat fact.
151. LIC v B. kusumo T. Rai, (1989) 1 Kant LJ S2.
152. AIR 19'37 Nag 270.
153. (1914) AC 932 (HL).
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the· truth, however deceptive in fact, does not amount to fraud, un.less there
is a duty to speak. Referring to the facts the court said that the law imposes
no general duty on anyone to broadcast the blemishes of his female relations;
not even to those who are contemplating matrimony with them. There was
no fiduciary re.lation between the parties. The engagement was, however,
held to be voidable by reason of the misrepresentation, but the plaintiff was
not entitled to recover any compensation under Section 75 of the Contract
Act.
3. Change of circumstances
Sometimes a representation is true when made, but, it may, on account
of a change of circumstances, become false when it is actually acted upon
by the other party. In such circumstances, it is the duty of the person who
made the representation to communicate the change of circumstances. In an
English case,1•54 for example:
A medical practitioner represented to the plaintiff that 'his ·practice
was worth £ 2000 a year'. The representation was true. But five months
later when the plaintiff actually bought the practice, it had considerably
gone down on account of the defendant's serious illness.
It was held that the change of circumstances ought to have been commu-
nicated. Similarly, in a case before the Madras High Court:155
"A company's prospectus represented that certain persons would be
the directors of the company. This was true. But before the allotment
took place, there were changes in the directorate, some directors having
retired."
That was held to be sufficient to entitle an allottec to avoid the allotment.
4. Half-truths
Even when a person is under no duty to disclose a fact, he may become
guilty of fraud by non-disclosure if he voluntarily discloses something and
then stops half the way. A person may keep silence, but if he speaks, a duty
arises to disclose the whole truth. "Everybody knows that sometimes half
7 for
a truth is no better than a down right falsehood." u In a US case,u
1
example:
T he plain tiff purchased a tract of land. The contr act of sale stated that
n
the land was subject to a right of the 1forough to open two streets withi
the area. But as a matte r of fact the Borough had the right to open three
streets.
Sllia:·
Holdi ng that the plaintiff h~d the right of rescission, CoRo ozo CJ
ted
"We do not say that the seller was under a duty to mention the projec
that
streets at all. That question is not here. What we say is merely this,
stop
having under taken or professed to mention them, he could not fairly
halfway."
s
As in misrepresentation, so in fraud by silence, if the plain tiff had mean
sion.
to discover the truth by ordin ary diligence, he canno t obtai n rescis
couJd
But in any other case the frauduJent party canno t say that the other
High
have discovered the truth. In a case, for example, before the. Gujar at
Cour t:158
False estimates of the costs of construction were given in a tender. The
was
contr actor agreed to some reduction on the belief that the estimate
r
correct. The court held that the representations contained in the tende
have
were fraudulent and that it was no defence that the plaintiff couJd
discovered the true costs by reasonable effort.
156. P,r Lord MACMA UCHTA N in G/Nclr.st,in v Barn••• 1900 AC 240, 2S0.
opinion collect ed from
157. jNniNs ConstrNctk,,r Corp11 v Coh•"• (1931) 2S7 NY 393. Facts and
Thum on and xavey, CASllS OP ToJtTS, 677 (1942).
M. Ha11anji 6- Son, v
158. R.C. Thaftlr.ar v Bombity HoN1ing Board, AIR 19?3 Guj 3◄ . But see
Stai. of M.P., AlR 196S SC 470, 472: 1963 Supp (2) SCR 23S. a p, (187S) LR 10 Ch
159. Clough v London 6- N . W. Rly Co, (1871) LR 7 Exch 26; Whitlllr..,,
◄◄9.
160. DDA v S/i,ipp.r Constntction Co (PJ Ltd, (2000) 10 SCC 130.
D ra w C
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178 CONTRACT-I
on of the
co ns ide rat ion . Th e po sse ssi pro pe rty wa s also no t given
to
the de fen da nt.
d h" h as go t ·executed by fraud
that su ch ad'gheetl,
It wa s he ldtat ion wa w ic _w
an d mi sre pre sen , 5 r1 . y set asi de.
guished .
F~ nd M_isrepresentation distin se
mi sre pre sen tat ion the statement is fal ;
. l. Bo th m fra ud an d o know
en t is ma de by a person, wh
bu t ~ f~aud the false sta tem wh ereas in
t it · fa l~ or do es no t believe in its truth, same
t~ IS
kin g the sfatement believes the
sen tat ion the pe rso n ma
~m sre pre
to be tru e. se
of the pe rso n maki~g a fal
~ - In_ fra ud , _th e int en tio n rty an d ind uc e him to enter into
oth er pa
sta tem en t,1 s to de cei ve the is no su ch wrongful intention
in
ntr ac t on tha t bas is. Th ere tha t
the co ha s be en noted in Derry v. Pe ek,
1
sre pre sen tat ion . It
ca se of mi y intention
h false, ·wa s ma de without an
wh en the sta tem en t, alt ho ug to fra ud . .
ce ive , it did no t am ou nt
to de to the
wh en the consent of a party
3. Acco rd ing to Section 19, tat ion,
s be en ob tai ne d eit he r by fra ud or by misrepresen
co ntr ac t ha
vo ida ble at the op tio n of the pa rty whose consent ha s
the contr ac t is for bo th
en so ob tai ne d. ln oth er wo rds , the contractual remedy rem ed y
be itional
is the sam e. In ca se of fra
ud , ho we ve r, there is an add
fra ud , i.e., an action for da mages un de r
av ail ab le to the vic tim of under law
law of tor ts, be cau se fra ud is als o a_tort. No remedy
the .
an innocen t misrepresentation
of tor ts is av ail ab le if it is tra~t
W he n the re is m isr ep res en ta tion by one party, the con
4. par ty, bu t no s uch remedy -IS
the op tio n of the oth er
is vo ida ble at mea.r:15
pa rty see kin g to .av oid ~~e contract ha d ,the
av ail ab le- if the
g the tru th wi th orchnary d1hge11ce. However
exc ept m ,, .
of dis co ve rin of the ot h:
pe rso n obtainin g the consent
ca se of fra ud ule nt silence, a ?w ed t_o say t~~ t the ~ther party cou
pa rty by fra ud ca nn ot be all
wi th ord ina ry diligence.
ha ve dis co ve red the tru th
t t ls voidable it is good
Vo id ab le ag re em en t contrac ere _a documllea~on wo uld be necessary
It is no w se ttledd tha t wh f
"d ed an , therefore' itsThcan ce t ofu
the instant case, rom
e fac
ac t un les s avo1
tur al co n~ qu en ~~ - f d tha t the grmind on which
av oid its na d wa s
to
int wh ich is on rec ord ;t is bounght is tha t the sale dee
the pla ed
ca nc ell ati on of s ale de ~d haan
s dee:; o~ yin g fraud on the record
i
...I
y p
ot ex ec ute d by coercion u · rsity
I g
1. (18 89) 14
2. See Exception to
AC 337Sec.ti 19 Als o see
on C . Narmada Aganva//n,
A.I.R. 1976 S.C . 376; L.I.
· v. .
A.I.R. 1
Shr i Krishna v. Kurn99ksh3eOlra. 1' :
ri.
'
I
I
Distinction between fraud and misrepresentation
Misrepresentation and fraud have many points in common: Fo~ instanc~,
both render the contract voidable; there is a ~se representation 10 both; 10
either case it is necessary that the consent should ~ave been cau~ed by the
fraud or {Jlisreprescntation and finally, where there 1s a fra~d by s~e~ce, th,,e
fact, that there were "means of discovering the truth by ordinary d1hgence ,
is a good defence."3 This is so in misrepresentatio~ also. Damag~s ~or loss
caused by innocent misrepresentation are assessed ~n the ~ame pn~c~pl~ as
in the case of a deliberate fraud. 164 Yet the following points of d1stmct1on
are also noticeable::
161. Hung,rford l111111tm111t Trust Ltd v Turn,r Morrison 6- Co Ltd, (2009) 2 CHN 330. .
162. Application for allotment of prcmi1e1 containing false particulars, fraud, allo~ment liable
to be act aside, Pon.1111,angam v S/1m1 Cl,aranc11 Board ofT.N., 1986 SCC OnL1ne Mad 20:
AIR 1996 M·ad 274. N,dungadi Banll Ltd v Erhima/a Ag,/ Products, AIR 2004 Ker 62,
court Nie at gross ·under value, pwchascr son of one of the judgment-debton and the joi.nt
--
purchucr wu • relative of the judgment-debtor, fraud, upon the procen of the court.
163. S. 19 (Exception).
164. Royscot Tru1t Lid v Rog,rson, (1991) 2 QB 297: (1991) J WLR 57 (CA).