Legal Environment of

Business

Lecture 12 Free Consent

by
Dr Nazrul Islam, MBA, PhD, LLB
OBJECTIVES
AFTER STUDYING THIS CHAPTER,
YOU SHOULD BE ABLE TO:

1. Define fraud
2. Effects of fraud
LEARNING

3. Distinction between misrepresentation

and fraud
4. Mistake
5. Types of mistakes
6. Case study
 FRAUD

The term fraud includes all acts

committed by a person with an
intention to deceive another person.
Fraud means and includes any of the
following acts –

1. The suggestion that a fact is true when it

is not true by one who does not believe it to
be true.
 FRAUD, Contd.,

2. The active concealment of a fact by a

person who has knowledge or belief of the
fact.
Exception: Mere non-discloser is not fraud.
A, sells by auction, to B a horse, which he
knows to be unsound. A says nothing to B
about the horse’s unsoundness. This is not
‘fraud’ because A is under no duty to disclose
the fact to B, the general rule of law being
‘let the buyer beware.’
 FRAUD Contd.,
3. A promise made without any intention of
performing it.

Example

X purchases certain goods from Y on credit

without any intention of paying for them as he
was in insolvent circumstances. It is a clear
case of fraud from X’s side.
 FRAUD Contd.,

4. Any other act fitted to deceive.

The fertility of man’s invention in devising

new schemes of fraud is so great that it
would be difficult to confine fraud within
the limits of any exhaustive definition.
 FRAUD Contd.,

5. Any such act or omission as the law

specially declares to be fraudulent.

Exception

The seller of immovable property is bound

to disclose to the buyer all material
defects in the property or in the seller’s
title. An omission to make such a disclosure
amounts to fraud.
 Can Silence be Fraudulent?

Mere silence as to facts likely to affect the

willingness of a person to enter into a
contract is not a fraud, unless –

1. The circumstances of the case are such that

it is the duty of the person keeping to speak,
or

2. Silence is, in itself, equivalent to speech.

 Mere silence is not a fraud

A and B, being traders, entered upon a

contract. A has a private information
of a change in prices which could
affect B’s willingness to proceed with
a contract. A is not bound to inform B.
 Silence is fraudulent in
contracts of ‘utmost good faith’

Silence is fraudulent, if the circumstances of

the case are such that ‘it is the duty of the
person keeping silence to speak’.

Silence is fraudulent in contracts of utmost

good faith i.e., contracts ‘uberrimae fidei’ in
which the law imposes a duty of abundant
disclosure on one of the parties thereto.
 Silence is fraudulent in
contracts of ‘utmost good faith’,
Contd.,
a) Fiduciary relation
b) Contracts of insurance
c) Contracts of marriage engagement
d) Contracts of family settlements
e) Share allotment contracts
 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.
Examples of a fiduciary relationship include
those of principal and agent, solicitor and
client, guardian and ward, and trustee and
beneficiary.
 Contracts of insurance

The assured must disclose to the

insurer all material facts concerning
the risk to be undertaken.
A concealment or misstatement of a
material fact will render the
contract void.
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.
Contracts of family settlements

Contracts of family settlement and

arrangements also require full
disclosure of all material facts within
the knowledge of the parties to such
contracts.
 Share allotment contracts

Promoters and directors, who issue

‘prospectus’ of a company to invite
the public to subscribe for shares
and debentures, are required to
disclose all information regarding
the company with strict and
scrupulous accuracy.
 Silence is fraudulent where
silence is, in itself, equivalent to
speech.

B says to A, “If you not deny it, I shall

assume the the horse is sound.” A says
nothing. Hence, A’s silence is equivalent
to speech. If the horse is unsound then
A’s silence is fraudulent.
 Effect of Fraud

A party, induced to enter into a contract

by frauds, has the following remedies –

1. He can rescind the contract, i.e., he can

avoid the performance of the contract.
2. He can ask for restitution and insist that
the contract shall be performed if the
representation made had been true.
3. He can also sue for damages, if any.
 Special Points for giving rise
to an action for deceit/fraud

1. Fraudulent representation must have

been instrumental in inducing the other
party to enter into the contract.

2. The plaintiff must have been actually

deceived by fraudulent statement.
 Special Points for giving rise
to an action for deceit, Contd.,

4. The plaintiff must be damnified.

Unless the plaintiff has sustained a
damage or injury, no action will lie.
5. In case of fraudulent silence, the
contract is not voidable, if the party
whose consent was so caused had
the means of discovering the truth
with ordinary diligence.
Distinction between Fraud and
Misrepresentation
1. Fraud implies an intension to deceive,
it is deliberate or willful; whereas
misrepresentation is innocent without
any intention to deceive.
2. Fraud is a civil wrong which entitles
the right of rescinding the contract
but misrepresentation gives only the
right to avoid the contract and there
can be no suit for damages.
 Distinction between Fraud and
Misrepresentation
3. In case of misrepresentation, the fact
that the aggrieved party had the means to
discover the truth with ordinary diligence
will prevent the party from avoiding the
contract.
But in case of fraud, excepting fraud by
silence, the contract is voidable even
though the party defrauded had the means
of discovering the truth with ordinary
diligence.
 Reasons of Loss of Right of
Rescission
1. Affirmation

If a person, who has purchased shares on

the faith of a misleading prospectus,
subsequently becomes aware of its falsity,
but accepts dividends paid to him, he will
not be permitted to avoid the contract.
 Loss of Right of Rescission

2. Restitution not possible

Where the subject-matter of the

contract has been consumed or destroyed,
the right of rescind the contract cannot
be exercised.
 Loss of Right of Rescission

3. Lapse of time

It may be treated as evidence of

affirmation where the party misled fails to
exercise his rights promptly on discovering
the representation to be untrue or on
becoming aware of the fraud or coercion.
 Loss of Right of Rescission

4. Rights of third parties

Where a person obtains goods by fraud

and, before the seller rescinds/cancel
the contract, disposes them off to a
bona fied party, the seller cannot then
rescind.
 Mistake

It can be of two types –

1. Mistake of law

2. Mistake of fact
 Mistake of Law
Mistake of law of the country

A and B make a contract grounded on the

erroneous belief that a particular debt is
barred by the Indian Law of Limitations; the
contract is not voidable i.e, the contract is
valid.
 Mistake of Law

Mistake of foreign law

Mistake of foreign law stands on the

same footings as the ‘mistakes of fact’.

Here, the agreement is void in case of

‘bilateral mistake’ only.
 Mistake of Fact

It may be of two types –

1. Bilateral mistake or
2. Unilateral mistake
 Bilateral Mistake

1. Both the parties must be under a

mistake
2. Mistake must relate to some fact
and not to judgment or opinion etc.
3. The fact must be essential to the
agreement
 Bilateral Mistake

Example

M, having two houses A and B, offers

to sell house A, and N not knowing
that M has two houses, thinks of
house B and agrees to buy it. Here,
there is no real consent and the
agreement is void.
 Unilateral mistake

Where only one of the contracting

parties is mistaken as to a matter
of fact, the mistake is a unilateral
mistake.
A contract cannot be voidable
merely because one of the parties
was under a mistake as to a matter
of fact.
 Contract Valid
If a man due to his negligence does not
ascertain what he is contracting about,
he must blame himself and cannot avoid
the contract.
Example
X buys rice from Y, by sample under
the impression that the rice is old. The
rice is, however, new. X cannot avoid
the contract.
 Contract Voidable

A, has a horse with a hole in the

hoof. A, so fills it up that the defect
cannot be discovered on a reasonable
examination. B, purchases the horse
under the impression that the horse
is sound.
Here A, is guilty of fraud and B can
avoid the contract on discovery of
the defect.
 Agreement void ab-initio

Where the consent is given by a

party under a mistake which is so
fundamental as goes to the root of
the agreement and has the effect
of nullifying consent, no contract
will arise even though there is a
unilateral mistake only.
Thank You