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Fraud under Indian Contract Act

 FRAUD [Section 17]


The term 'fraud' means a false representation of fact made willfully with a view to deceive the other party. Fraud includes following: 

1. Wrong suggestion about a fact, knowing that it is not-true; 
E.g., X sells to Y locally manufactured goods as imported goods charging a higher price, it amounts to fraud. OR A seller claimed that his projector is made in Singapore, and sold it for Rs. 100,000/- However the fact is that "Projector was made in south India". 

2. Active concealment (Hide) of defect in goods: 
E.g. "A car-painter, uses paint to hide the scratches over the old furniture and sold it claiming that is Now". This is fraud. OR X a furniture dealer, conceals the cracks in furniture sold by him by using some packing material and polishing it in such a way that the buyer even after reasonable examination cannot trace the defect, it would tent amount to fraud through active concealment. 

3. Promise made without intention to perform: 
E.g. "A man and a woman underwent a ceremony of marriage with the husband not regarding it as a real marriage. Held, the husband had no intention to perform the promise from the time he made it and hence the consent of the wife was obtained under fraud. OR "A farmer agrees to supply 100kg potato that will be produced by him out of his field, after three month". Two months has been lapsed, but the farmer neither implant seeds, nor does cultivation. This is case of fraud. 

4. Any activity declared fraud as per other law; under companies act and insolvency acts, certain kinds of transfers have been declared to be fraudulent. 
Note: In case of fraud, the seller is always liable even though buyer has an opportunity to check the fraud. 

5. Any activity fitted (supported) to deceive. It covers those acts which deceive but are not covered under any other clause. 

Can Silence be Fraudulent? 

The Explanation to Section 17 deals with cases as to when ‘silence is fraudulent’ or what is sometimes called ‘constructive fraud.’

1. As a rule mere silence is not fraud because there is no duty cast by law on a party to a contract to make a disclosure to the other party, of material facts within his knowledge.

Illustration: - A and B, being traders, enter upon a contract. A has private information of a change in prices which would affect B’s willingness to proceed with the contract. A is not bound to inform B [Illustration (d) to Section 17].

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 contracts of ‘utmost good faith’’ i.e., contracts ‘uberrimae fidei.’ The following contracts come within the class of ‘uberrimae fidei’ contracts: 

(a) Fiduciary relationship - When the parties stand in a fiduciary relation to each other, the person in whom confidence is reposed is under a duty to act with utmost good faith and to make a full disclosure of all material facts concerning the transaction known to him.

(b) Contracts of insurance - In contracts of marine, fire and life insurance, the insurer contracts on the basis that all material facts have been communicated to him; and it is an implied condition of the contract that full disclosure shall be made, and that if there has been non-disclosure he shall be entitled to avoid the contract.

(c) Contract of marriage engagement - Every material fact must be disclosed by both parties to a contract of marriage otherwise the other party is justified in breaking off the engagement

(d) Contracts of family settlements- Contracts of family settlements and arrangements also require full disclosure of all material facts within the knowledge of the parties to such contracts.

(e) Share allotment contracts- Promoters and directors, who issue the ‘prospectus’ of a company to invite the public to subscribe for shares and debentures, possess information which is not available to general public and as such they are required to disclose all information regarding the company with strict and scrupulous accuracy

3. Silence is fraudulent where the circumstances are such that “silence is, in itself, equivalent to speech.” Where, for example, B says to A — “If you do not deny it, I shall assume that the horse is sound.” A says nothing. Hence A’s silence is equivalent to speech. If the horse is unsound A’s silence is fraudulent [Illustration (c) to Section 17].

Effect of Fraud

 A party, who has been induced to enter into a contract by fraud, has the following remedies open to him:

1. He can rescind the contract i.e.; he can avoid the performance of the contract; being voidable at his option (Sec. 19). 

2. He can ask for restitution and insist that the contract shall be performed, and that he shall be put in the position in which he would have been, if the representation made had been true (Sec. 19).

3. The aggrieved party can also sue for damages
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