Dated: 21st May,2020

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FRAUD
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3. FRAUD (Sec 17)

Section 17 in The Indian Contract Act, 1872

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 agent, 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 speak, or unless
his silence, is, in itself, equivalent to speech.
Illustrations

(a) A sells, by auction, to B, a horse which A knows to be unsound. A says nothing to B

about the horse’s 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 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.

ESSENTIALS OF FRAUD

According to Section 17, following are the essentials of Fraud: -

 There should be a false statement of fact by a person who himself does not
believe the statement to be true.
 The statement should be made with a wrongful intention of deceiving another
party thereto and inducing him to enter into the contract on that basis.

False statement of fact [SECTION17 (1)]

In order to constitute fraud, it is necessary that there should be a statement of fact which
is not true. Mere expression of opinion is not enough to constitute fraud.
For example – in the case of Ram Bai v Life Insurance of India, A person, who is aged
over 60 years and thus beyond insurable age, deliberately makes a false statement that
his age is 48 years in order to take out an insurance policy, it amounts to fraud, and the
insurer is entitled to avoid the policy.
In Edington vs. Fitzmaurice1, a company was in great financial difficulties and needed
funds to pay some pressing liabilities. The company raised the amount by the issue of
debentures. While raising the loan, the directors stated that the amount was needed by
the company for its development, purchasing assets and completing buildings. It was
held that the directors had committed a fraud.

Mere silence is no fraud

It has been noted above that to constitute fraud; there should be a representation as to
certain untrue facts. Active concealment has also been considered to be equivalent to a
statement because in that case, there is a positive effort to conceal the truth and create
an untrue impression on the mind of the other. Mere silence, however, as to facts in no
fraud. Explanation to “section 17”, in this connection, incorporates the following
provision:
“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 speak, or unless his silence
is, in itself, equivalent to speech”.

In Keates vs. Lord Cadogan,2 A let his house to B which he knew was in ruinous
condition. He also knew that the house is going to be occupied by B immediately. A
didn’t disclose the condition of the house to B. It was held that he had committed no
fraud.
In Shri krishan vs. Kurukshetra University3, Shri Krishan, a candidate for the L.L.B.
part 1 exam, who was short of attendance, did not mention that fact himself in the
admission form for the examination. Neither the head of the law department nor the
university authorities made proper scrutiny to discover the truth. It was held by SC that

1
(1885) 29 Ch. 459, Indian contract act, RK Bangia

2
(1851) 10 C.B. 591
3
A.I.R. 1976 S.C. 376
there was no fraud by the candidate and the university had no power to withdraw the
candidate on that account.

EXCEPTIONS:-
 When there is a duty to speak, keeping silence is fraud.
 When silence is, in itself, equivalent to speech, such silence is a fraud.

DUTY TO SPEAK (Contracts Uberrima Fides)

When the circumstances of the case are such that, regard being had to them, it is the
duty of the person keeping silence to speak, keeping silence in such a case amounts to
fraud. When there is a duty to disclose facts, one should do so rather than to remain
silent.
In Life Insurance Corpn. of India v. Asha Goel4, the apex court explained:
The contracts of insurance including the contract of life insurance uberrima fides (of
utmost good faith) and every fact of material must be disclosed, otherwise, there is good
ground for rescission of the contract. The duty to disclose material facts continues right
up to the conclusion of the contract and also implies any material alteration in the
character of risk which may take place between the proposal and acceptance. If there
are any misstatements or suppression of material facts, the policy can be called into
question. For determination of the question whether the suppression relates to a fact
which is in the exclusive knowledge of the person intending to take the policy and it
could not be ascertained by a reasonable inquiry by a prudent person.

Marital status – Non-disclosure

Non-disclosure of material facts relating to parties to the marriage has been held to
constitute fraud within the meaning of section 17 of the Indian Contract Act, 1872.

In Kiran Bala vs. Bhaire Prasad Srivastava,5 first marriage of the appellant, Kiran
Bala, had been annulled on the ground that she was of unsound mind at the time of that
marriage. She was married to the respondent, Bhaire Prasad Srivastava, the second

4
A.I.R. 2001 S.C. 549. See also Ratan Lal vs. Metropolitan Ins. Co. ltd., A.I.R. 1959 Pat. 413.
5
A.I.R. 1982 M.P. 242
time. The fact of the annulment of the first marriage on the ground that she was an idiot
was not disclosed to the bridegroom either by the girl or her parents. It was held that it
was not the duty of the bridegroom to find out these facts, but it was the duty of the girl
or her parents not to conceal these facts. Consent of the bridegroom was held to have
been obtained by fraud, and the second marriage of the appellant with respondent was,
therefore, annulled by a decree under section 12(1) (c) of the HINDU MARRIAGE
ACT.

2. SILENCE BEING EQUIVALENT TO SPEECH

Sometimes keeping silent as to certain facts may be capable of creating an impression
as to the existence of a certain situation. In such a case, silence amounts to fraud.

Means of discovering the truth

“If such consent was caused by misrepresentation or by silence fraudulent within the
meaning of section 17, the contract, nevertheless, is not voidable, if the party whose
consent was so caused had the means of discovering the truth with ordinary diligence”

In Shri Krishan vs. Kurukshetra University, 6Shri Krishan, a candidate for the L.L.B.
part 1 examination of the university did not complete the prescribed number of lectures
which could make him eligible for appearing in the examination. He, however, filled
the examination form for appearing in the examination without mentioning the fact that
his attendance was short. The university authorities could have discovered the truth by
proper scrutiny. The university wanted to cancel the candidature of the candidate on the
ground of fraud. It was held that there was no fraud as the candidate has just kept silent
as to certain facts and further, the university authorities could have discovered the truth
with ordinary diligence.

ACTIVE CONCEALMENT [section 17(2)]

When there is an active concealment of a fact by one having knowledge or belief of the
fact, that can also be considered to be equivalent to a statement of fact, and amount to
fraud. By active concealment of certain facts, there is an effort to see that the other
6
A.I.R. 1976 S.C. 376.
party is not able to know the truth and he is made to believe as true which is in fact not
so.

Example: A is entitled to succeed to an estate at the death of B. ‘B’ dies. C having

received intelligence of B’s death, prevents the intelligence reaching ‘A’ and thus
induces A to sell him his interest in the estate. The sale is voidable at the option of A.

PROMISE MADE WITHOUT ANY INTENTION TO PERFORM IT [section 17(3)]

When a person makes a promise, there is deemed to be an undertaking by him to
perform it. If there is no such intention when the contract is being made, it amounts to
fraud. Thus, if a man takes a loan without any intention to repay, or when he is
insolvent, or purchases goods on credit without any intention to pay for them, there is
fraud. If, there is no such bad intention at the time of making contract, but the promise
doesn’t perform the contract, it doesn’t amount to fraud.

ANY OTHER ACT FITTED TO DECEIVE [section 17(4)]

Clause (4) provides that ‘any other act fitted to deceive’ will also amount to fraud. This
clause is general and is intended to include such cases of fraud which would otherwise
not come within the purview of the earlier three clauses.

ANY ACT OR OMISSION WHICH THE LAW DECLARES AS FRAUDULENT

[section 17(5)]
According to this section 17(5), fraud also includes any such act or omission as the law
specially declares to be fraudulent. In such cases, the law requires certain duties to be
performed, failure to do which is expressly declared as a fraud.

In Akhtar Jahan Begam vs. Hazarilal, 7A sold some property to B stating in the sale
deed that he won’t be liable to B if he suffered any loss owing to A’s defective title. A
had, earlier to this transaction, sold this property to somebody else, but didn’t inform B
about it. It was held that A had committed fraud and the contract was voidable at the
option of B.
WRONGFUL INTENTION
7
A.I.R. 1927 All. 693.
In order to constitute a fraud, it is necessary that a person should intentionally make a
false statement with an intent to deceive another party thereto to induce him to enter
into the contract. If the intention to deceive the other party is absent, there is no fraud. It
may, in such a case, be a mere mis presentation as defined in Section 18 of the Act.

Contracts on the basis of false statement: -

It is necessary that the false statement must have been made to induce the other party to
enter into the contract.

In Kamal Kant vs. Prakash Devi, the plaintiff, Kamal Kant filed a suit against his
mother, Prakash Devi and some others seeking the cancellation of the trust deed on the
ground that his signature to it was obtained by fraud by falsely telling him that it was
the general power of attorney. The deed, in this case, was attested by the plaintiff’s
father and an advocate. The plaintiff was an educated man and had all the means to
know the contents of the document. Under these circumstances, it was held that there
was no fraud in this case.
In case of Horsfall v Thomas, it was held that if there is a patent defect in an article
supplied to a buyer and the buyer has an opportunity to examine the same, neglects to
do so, the supplier cannot be considered guilty of fraud for not pointing out the defect.

Statement should be meant for the party who is misled: -

It is necessary that the misleading statement should be meant for the party who is
misled. In the case of Peek v Gurney, it was held that if a person is purchasing the
shares of the company on the basis of any prospectus then he can’t sue the company
later on because the prospectus is meant for an original allottee of the shares by the
company, not for the person like the present appellant who buys the shares from the
original allottee and therefore, the promoters were not liable for fraud.
Suppressio veri

A misrepresentation of the truth by the omission or suppression of certain key facts, a lie of
omission.

Smt. Haseena Begum vs Sri. Abdul Sardar (on 14 February, 2017) is a recent
judgemnt where the court held that the plaintiffs are guilty of suppressio virae and
suggestio falsie. The execution of Lease Deed for the development of immovable
property is admitted.

DAMAGES FOR FRAUD

Fraud is essentially a question of fact, and the person who alleges that has to prove the
same.
In Firbank’s Executors v Humphreys, the damages for fraudulent misrepresentation,
under the general rule, were arrived at by considering the difference in the position the
plaintiff would have been in, had the representation been true and, in the position,, he is
actually in, in consequence of it’s being true.

The principles applicable in asserting damages for fraudulent misrepresentation have

been stated by Lord Browne-Wilkinson in Smith New Court Ltd v Scrimgeour Vickers
(Asset Management) Ltd:

 The defendant is bound to make reparation for all the damage directly flowing from
the transaction.
 In assessing such damage, the plaintiff is entitled to recover by the way of damages
the full price paid by him, but he must give credit for any benefit which he has
received as a result of the transaction.
 As a general rule, the benefits received by him include the market value of the
property acquired but such general rule is not applicable where to do so would
prevent him obtaining for the wrong suffered.
 In addition, the plaintiff is entitled to recover consequential losses caused by the
transaction.
 The plaintiff must take all reasonable steps to mitigate the loss once he has
discovered the fraud.