Fraud, we listen to this word very often in our day to day is used in various statutes. in this article, I have tried to briefly cover what exactly it means in contract law.

consent given by a party is not said to be free when it is caused by fraud. Fraud is defined under sec. 17 of the Indian Contract Act as the following: –

“17. ‘Fraud’ defined. — ‘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: —

(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;

(5) 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 speak2, or unless his silence, is, in itself, equivalent to speech.”

The Essentials of fraud: – 

  1. It should be done by one party of the contract
  2. There must be a representation
  3. The representation must be false
  4. The fraud must be committed before completion of the contract
  5. The misrepresentation should be made by the will of the party
  6. There should be an intention to deceive the other party
  7. The other party must actually be deceived
  8. The other party has suffered a loss due to this misrepresentation with a mala fide intention.

A famous English case House of lords in Derry v. Peek[1] is an example under this concept. In this case, A company’s prospectus said that it was authorised by a special act of Parliament to run trams by stream or mechanical power. This was however not true. The plaintiff was a shareholder and sued the directors for fraud. The defendants were not held liable in this case.

An Indian case is, Haji Ahmad Yarkhan v. Abdul Gani Khan [2], the plaintiff could not recover the expenses incurred for the engagement of his son. the marriage was broken because the girl’s family hid the facts about her health. Silence or non-disclosure of essential facts may not amount to  a fraud.

Sec.19 of the Indian Contract Act,1872

“19. voidability of agreements without free consent.—When consent to an agreement is caused by coercion, 1[***] fraud or misrepresentation, the agreement is a contract voidable at the option of the party whose consent was so caused.

A party to contract, whose consent was caused by fraud or misrepresentation, may, if he thinks fit, insist that the contract shall be performed, and that he shall be put in the position in which he would have been if the representations made had been true.”

The contract is not voidable : –

  1. When the party who consent was caused by silence amount to fraud and be has the means of discovering the truth with ordinary diligence.
  2. When a party gives the consent by ignoring the fraud.
  3. When the party takes a benefit after getting the knowledge about the fraud.
  4. When the parties cannot be restored to their initial position.
  5. When the interest of a third party is intervened before the contract is avoided.

[1] House of lords in Derry v. Peek (1889) LR 14 AC 337 (HL)

[2] Haji Ahmad Yarkhan v. Abdul Gani Khan AIR 1937 Nag 270.

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