Fraud in Law of Contract
Fraud in Law of Contract: Explained
Introduction:
Fraud means to get advantage over another by false suggestions or by suppression of truth, and includes all surprise, trick, cunning, dissembling, any unfair way by which another is cheated Fraud vitiates all types of transactions and proceedings. Parties can never be said to have consented freely where fraud have been practiced to obtain the same.
Meaning and Definitions of Fraud:
Following are some of the most important definitions of fraud:
(1) Black's Law Dictionary:
Fraud is “An intentional perversion of truth for the purpose of inducing another in reliance upon it to part within some valuable thing belonging to him or to surrender legal right”.
(2) Section 17 of Contract Act 1872:
‘Fraud’ 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 or to induce another party thereto or his agent, to enter into the contract:
- 1. The suggestion as to a matter of 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 an 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.
Illustrations:
(a) A sells, by auction, to B, a horse which A le1ows to be unsound. A says nothing to B about the horses’ unsoundness. This is not fraud in A.
(b) B says to A, “If you do not deny it, I shall assume that the horse is sound”. A says nothing. Here A’s silence is equivalent to speech.
(c) A sells a horse by auction to B, his daughter, who has just come of age. Here the relations between the two parties would make A’s duty to tell B if the horse is unsound. If A does not disclose this, it would amount to fraud.
(d) A and B, being traders, enter upon a contract. A has private information of a change in price which would affect B’s willingness to proceed with the contract. A is not bound to inform B.
3. Acts which amount to Fraud:
Following Acts, under Section 17, amount to fraud:
(1) Suggestion Regarding Facts:
When a party to the contract makes a false statement intentionally, he would be liable for fraud. But if a person honestly believes his statement to be true, he cannot be held liable for fraud.
Illustrations:
(a) A tells B knowing to be false that his factory produces 500 pounds of butter per day. On this suggestion, B agrees to buy the factory. A is guilty of fraud.
(b) A knows that his watch is made in Pakistan. In order to sell his .watch he tells B that it is made in Japan. B buys the watch. A is guilty of fraud.
(2) Active Concealment of Fact:
When the party to the contract conceals material facts, essential to the contract which he is under an obligation to disclose to the other party before entering into a contract, he is guilty of fraud. According to section 16 (A) of sale of goods act, the seller is bound to disclose to the buyer about the faults in the goods he is selling.
Illustration:
A sells a horse to B. The horse has a cracked hoof. A fills it up to conceal the defect. B cannot find the defect. A is guilty of fraud.
(3) Promise without Intention of Performance:
If a man while entering into a contract has no intention to perform his promise, there is a fraud on his part.
Illustrations:
(a) X purchases certain goods from Y on credit without any intention of paying for them as he was under insolvent circumstances. X is guilty of fraud.
(b) A knowing that he has no money, takes a dinner in a hotel with an intention of slipping away. A is guilty of fraud.
(4) Any Act with Intention to Deceive:
A person can adopt different methods to cheat the other party. It is, therefore, difficult to explain all the methods under the definition of fraud. However, according to this sub-section all the unfair ways which a man can adopt to deceive the ether party will be considered fraud.
(5) Any Act or Omission declared to be Fraudulent:
According to this sub-Section it is obligatory to disclose relevant facts to the other party in certain cases. Under Section 55 of the Transfer of Property Act, the seller is bound to disclose to the buyer all material defects about the property i.e. property is mortgaged, etc. If someone omits to disclose facts he would be guilty of fraud. A mere expression of opinion or commendatory expression is not fraud. For example if someone says that land is very fertile or our products are best in the market.
4. Essential Elements of Fraud:
Almost every above listed act amounting to fraud is made up of the following elements:
(1) There must be a false representation:
Without representation there can be no fraud, except in cases where silence may itself amount to fraud or where there is 'no active concealment of fact.
(2) The representation must relate to a Fact:
For example A tells B, “My horses are as good as X’s”. This is a statement of opinion and not of fact.
(3) Representation must have been made:
Before the conclusion of the contract with the intention of causing the other party to enter .into a contract.
(4) Representation must have been made with the knowledge of its falsity or without believing it to be true or recklessly.
(5) The other party must have been induced to act on such representation:
In Smith vs. Chadwick (1869) LR. 4 H.L. 64, A bought shares in a company on the faith of prospectus which contained a false statement that one B was a director of the company. A never heard of B earlier and the statement was held to be immaterial from his point of view. A can’t claim damages as he was not induced to buy shares on the faith of false statement.
(6) The other party must have been deceived:
If the representation doesn’t come to the notice of the party, it cannot be said to have misled the party.
In Horsefall vs. Thomas (1862) l H & C 69, A bought a pistol from B. The Pistol had a hole in it which was plugged by B. A did not examine the pistol but when he used it, it burst. Held, B did not deceive it.
(7) The other party acting on the representation must have suffered a loss. Rule of common law is that there can be no damage without an injury.
5. Effect of Fraud on Contract:
A contract tainted by fraud is not void, but only voidable at the option of the party defrauded. Until it is avoided, the transaction is valid.
6. Remedies available against Fraud:
Following remedies are available in case of fraud:
1. The injured can rescind the contract, but it must be done within a reasonable time. If in the meanwhile other parties have acquired interest in the property for value, the remedy is lost.
2. Suit for damages can be filed.
3. He can insist on specific performance of the contract so that parties are pat in a position in which they would have been if the fraud were not committed.
7. Silence whether Fraud?
According to the explanation attached in Section 17 Mere silence as to facts likely to effect the willingness of a person to enter into a Contract is not fraud, unless:
(a) 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 (b) Silence is, in itself, equivalent to speech
It, therefore, follows that:
(1) As a rule mere silence is not fraud because the law does not impose any duty in the party to a contract to disclose the material facts known to him, to the other party.
Illustration:
A and B being traders, enter into a contract. A has a private information of a change in prices which may affect B’s willingness to enter into a contract. A is not bound to inform B.
(2) Silence is fraudulent, if the circumstances of the case are such that it is the duty of the person keeping silence to speak. In other words, silence is fraudulent in contract of utmost good faith. These are the contracts in which the law imposes a duty of disclosure on one of the parties due to relationship and other reasons.
(3) Silence is fraudulent where the circumstances are such that ‘silence’ is in itself, equivalent to speech.
Illustration:
B says to A, “if you do not deny it, I shall assume that horse is sound.” A says nothing, Here A’s silence is equivalent to speech. If the horse is unsound A’s silence is fraudulent.
8. Conclusion:
Fraud is a false representation of a matter of fact, whether by words or by conduct, by false or misleading allegations, or by concealment of that which should have been disclosed, which deceives and is intended to deceive another so that he shall act upon it to his legal injury Elements for a cause of action for “fraud” include false representation of a present or past fact made by defendant, action in reliance thereupon by plaintiff, and damage resulting to plaintiff for such representation.
Relevant Searches and Questions:
What is Fraud? Meanings and Definitions.
What is the suggestions of a fact fraud?
Discuss Fraud in the light of its Elements by giving illustrations.
When Silence becomes fraud?