Free Consent - Fraud – Sec.17 -

Fraud – Sec.17 -  

Fraud exists when –

1. a false representation made –

• knowingly, or
• without belief in its truth, or
• Recklessly careless whether it be true or false. 

2 concealment of a material fact or  partial statement of fact, so that the withholding of fact makes the statement made false .

3.  promise is made without any intention of performing it.

4. any other act to deceive.

5. any act or omission specially declared to be fraudulent.

A false statement must have been made intentionally with an intention to deceive the other party or to induce him to enter into a contract.

Derry Vs. Peek – Directors of a company issued a prospectus – made a statement that company had been authorised by a special Act of Parliament to run tramways by steam or mechanical power – actually authority to use steam was subject to consent of Board of Trade – however, no mention was made of this– directors honestly believed that permission would be granted  - permission was refused – consequently company later wound up – plaintiff who had bought some shares, sued the directors for fraud - Held, directors guilty of misrepresentation not fraud as they honestly believed that one the Parliament had authorised the use of steam, the consent of the Board was practically concluded.

Requirements of fraud :

1. there must be false representation – however, in few cases even silence or non-disclosure constitutes fraud.

Peek Vs. Gurney – Prospectus did not refer to existence of liabilities – gave impression that company was prosperous – Held, non-disclosure amounted to fraud and investors who had relied upon the prospectus could rescind the allotment.

If any statement made is true on the date when it is made – but becomes untrue before the contract is actually entered into – must be corrected – non-correction is fraud – contract can be rescinded. 

With Vs. O’Flanagan – Negotiations for sale of medical practice started in January – representation made that practice was worth £2,000 a year – contract concluded in May when earnings fell to £5 per week due to defendant’s serious illness – Held, failure to disclose the fall in takings is fraud – contract would be rescinded.

2. Representation must relate to material fact -  mere opinion, commentary or hearsay is not representation of fact.

Bisset Vs. Wilkinson  - Certain land sold – vendor aware that land required for sheep farming - Vendor told prospective buyer that in his opinion the land had carrying capacity of  2,000 sheep – land turned out to be unsuitable for sheep farming – Held, there was no misrepresentation as the statement was one of opinion which was honestly held.

3. Representation must be made before conclusion of contract – made with intention to inducing the other party to act upon it.

4. Representation must have been made with knowledge of its falsity or without belief in its truth or recklessly, not caring for its truth or otherwise  - can be made by the party to the contract or with his connivance or his agent.

5. The other party must have been induced to act upon the representation.

Smith Vs. Chadwick  - A bought shares in a company on faith of prospectus – a false statement contained in prospectus that B was a director in the company – B had never heard of B and therefore statement was immaterial to him – Held, the untrue statement had not induced A to buy the shares – A cannot claim damages on ground of fraud.

6. Other party must have relied upon the representation and must have been deceived.

Horsefull Vs. Thomas – T bought a cannon from H – cannon was defective but plugged by H – T did not examine the cannon – On use, the cannon burst – Held, the plug had not deceived T – Hence, contract not vitiated by fraud.

7. Other party, on acting upon the representation, must have suffered some loss – fraud without damage does not give rise to action on deceit/cheating.

Consequences of fraud : Contract induced by fraud is voidable at the option of the party deceived – until rescinded, it is valid – the defrauded party has following remedies :

1.he can rescind the contract – must be within reasonable time – if in the meanwhile, a third party has acquired an interest in the subject matter for value and good faith, contract cannot be rescinded.

Example – A purchases land from B by wilfully making false representation – A sells the goods to C before B rescinds the contract – B has lost the right to avoid the contract as a third party (C) has acquired interest in it. 

2.He can insist on the performance of contract on the condition that he be put in the position in which he would have been if the

3.representation had been true.

4.He can sue for damages.

Contract not necessarily voidable  - When consent caused by coercion, fraud or misrepresentation, contract voidable at the option of party whose consent is so caused (Sec.19).  However, in following cases, the contract is not voidable –

1.where consent caused by mis-representation or fraud but that party could discover the truth by ordinary diligence.

Example : A mis-represented to B to believe 500 tonnes of indigo made at A’s factory – B inspected the factory – found it could produce 400 tonnes only – B buys the factory – Held, contract is not voidable on account of mis-representation by A.

2.where plaintiff is ignorant of mis-representation or fraud.

3.Where before the rescission, third party acquires interest in subject matter of contract for value and bona fide.

4.Where the party after becoming aware of his right to rescind, affirms the contract.

Long Vs. Lloyd – A induced B to buy lorry – false representation that lorry was in excellent condition – when B used it and discovered it to be in bad shape – B wanted to return it – A agreed to bear half the cost of repairs and B agreed to it – Later lorry broke down completely – B wanted to rescind the contract – Held, acceptance of A’s offer to bear half the cost of repairs, implies B’s final acceptance of the sale – contact cannot be rescinded.

5.Where rescission not made within reasonable time – example - thus where shares allotted on basis of misleading prospectus in July and move to rescind the contract made in December – plaintiff precluded from obtaining the relief on account of unexplained delay of five months. 

Mere silence is no fraud  : A contracting party is under no obligation to disclose the material facts to the other party – but he must not make active concealment (like concealing a crack in a machine by filling it and repainting it) –

Keates Vs. Lord Cadogan – Before letting a house, landlord did not inform the tenant that house in ruinous condition – Held, landlord nor liable for fraud – tenant should have inspected the house.

Shri Krishan Vs. Kurukshetra University – candidate had full knowledge of fact that he was short of attendance – did not mention this fact in his examination form – Held, its is not fraud, it is duty of University to scrutinise forms and to call for verification or information in case of doubts – University failed to do so – estopped from cancelling the examination of the candidate.

However, there are statutory exceptions to the above rule :

1. where under given circumstances, the person keeping silence is under duty to speak.

Example – A father selling a horse to his son must tell him if the horse is unsound, as the son is likely to rely upon his father.  

The duty to disclose the truth will arise in all cases where one party reposes and other party accepts, confidence – also arises where one party is utterly without any means of discovering the truth and has to depend on the good sense of the other party – in absence of any such relationship, there is no duty to speak.

Haji Ahmad Yarkhan Vs. Abdul Gani Khan  - plaintiff spent a sum of money to mark engagement of his son – later discovered the girl to be epileptic – broke off engagement – sued other party for compensation for loss suffered due to deliberate suppression of vital fact – Held, law imposes no general duty on any one to broadcast the blemished of his female relations – not even to those who are contemplating matrimony with them – no fiduciary relation between parties -  voidable due to mis-representation – no compensation as no fraud. 

2.Where silence is equivalent to speech

Example – A says to B, “If you do not deny it, I shall presume that the horse that you are selling me is sound.” – If B says nothing, his silence is equivalent to speech. 

3.Change of circumstances  - where representation true when made, but becomes false on account of change in circumstances – actually acted upon by other party – duty of the person making the representation to communicate the change of circumstances. 

With Vs. O’Flanagan – Negotiations for sale of medical practice started in January – representation made that practice was worth £2,000 a year – contract concluded in May when earnings fell to £5 per week due to defendant’s serious illness – Held, failure to disclose the fall in takings is fraud – contract would be rescinded.

4.Half-truths – even where person is under no duty to disclose a fact, he may be guilty of fraud by non-disclosure if he voluntarily discloses something and then stops half way – a person may keep silence, but if he speaks, a duty arises to disclose the whole truth.

Junius Construction Corpn. Vs. Cohen – plaintiff purchased a tract of land – contract of sale stated that land subject to the right of Borough (local government in a small town) to open two streets within the area – actually the Borough had the right to open three streets – Held, though seller was under no duty to mention the projected streets at all, but having undertaken or professed to mention them, he could not fairly stop halfway – plaintiff had right to rescission. 

R.C. Thakkar Vs. Gujarat Housing Board – false estimates of costs of construction given in a tender – contractor agreed to some reduction on the belief that the estimate was correct – Held, representations contained in tender were fraudulent – no defence that plaintiff could have discovered the true costs by reasonable efforts. 

5.If seller fails to inform the buyer as to a latent defect (a defect known to the seller but not apparent on an ordinary inspection), silence amounts to fraud.

6.If trustee does not make full disclosure of facts to the beneficiary while entering into a contract with him as to the property of which he is a trustee  - his silence as to material facts amount to fraud. 

Distinction between fraud and misrepresentation –

Basis	Misrepresentation	Fraud
Intention	There is no intention to deceive the other party.  It is innocently made.	There is an intention to deceive the other party.  It is deliberate or wilful.
Belief	The person making the representation believes to be true.	The person making the representation does not believe it to be true or makes it recklessly without caring as to whether it is true or false.
Tort	Simple misrepresentation is no tort.	It is a cause of action in tort for damages.
Rescission and damages	The aggrieved party can rescind the contract or sue for restitution.  However, there can be no suit for damages.	The aggrieved party can rescind the contract and also sue for damages.
Discovery of truth	The aggrieved party cannot avoid the contract if he had the means to discover the truth by ordinary diligence.	Where there is active concealment, contract is voidable even though aggrieved party had the means to discover the truth with ordinary diligence.