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Fraud (Contract Law)


Fraud (Contract Law)
Fraud (Contract Law)

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Fraud (Sections 17 and 18)


Fraud within the context of a contract encompasses any of the following acts perpetrated by a party to the contract, or in collusion with them, or by their agent, with the aim of deceiving the other party or their agent, or to induce them to enter into the contract:



(i) Presenting as fact something that is untrue, by someone who knows or believes it to be false.


(ii) Actively concealing a fact by someone who possesses knowledge or belief of the fact.


(iii) Making a promise without any genuine intention of fulfilling it.


(iv) Engaging in any other deceptive act.


(v) Any act or omission explicitly designated as fraudulent by law.

 
 

Explicit Assertions


(a) There must be an explicit assertion by the party. Mere silence on certain facts, even if they could potentially impact the other party's willingness, does not constitute fraud.


(b) The assertion must concern something false, not true.


(c) The party making the false assertion must knowingly make it, fully aware that it is false. If the party believes the assertion to be true, even if it's false, it doesn't amount to fraud.



Examples


(i) Hobbs sells pigs to Ward, knowing they are sick but sells them "with all faults" without disclosing their illness. Hobbs' silence on this matter does not amount to fraud [Ward vs Hobbs (1878) A.C. 13]. However, this doesn't mean silence can't be fraudulent in all cases.



(ii) In relationships of fiduciary nature (e.g., between parent and child, guardian and ward), silence can constitute fraud. For instance, if a father sells an unsound dog to his daughter, he should disclose its condition due to their fiduciary relationship.



(iii) Silence can be considered fraudulent when circumstances make it equivalent to speech [Explanation to Section 17].



(iv) Suppressing relevant truths also constitutes fraud. For instance, if a company issues a prospectus omitting to disclose its liabilities, it creates a false impression of its financial status, amounting to fraud.



Factual Statements

The assertion or representation alleged to be false must relate to a factual statement, not merely an exaggerated description. An exaggerated description alone does not constitute fraud.


Example


Ahmed is selling his horse and describes it as the 'Black Princess', a 'pride possession', and worth Rs 45,000. Expressions like 'pride possession' and 'Black Princess' are subjective opinions and do not amount to fraud.



However, if Ahmed had purchased the horse for Rs 25,000 only, claiming it is 'worth Rs 45,000' would be a misstatement of fact and considered fraudulent.




Intent and Deception


The assertion or statement must be made either knowingly false, without belief in its truth, or recklessly without due care to verify its accuracy. In simpler terms, a person may be held liable for fraud in the following circumstances:



(i) Knowingly making a false statement.


(ii) Making a statement without believing it to be true.


(iii) Making a statement recklessly, without taking reasonable care to verify its truthfulness.



Example:

These points are illustrated in the case of 'Reese River Silver Mining Company vs Smith' [(1869) L. R. 4 H. L. 64]. In this case, the company provided false information in its prospectus regarding its wealth in Nevada.



A share broker purchased shares in the company based on this information. Upon discovering the falsity of the information, the broker sought to annul the contract.


The court held that he could do so because the false representation in the prospectus constituted fraud.



(iv) The assertion or statement must be made with the intention of inducing the other party to act upon it. In essence, there must be a deliberate intention to influence the other party's actions.


If it can be demonstrated that there was no such intention, the false statement, lacking intent, would not constitute fraud.



(v) The assertion or statement must actually deceive. It is commonly said that deceit that fails to deceive does not amount to fraud. In other words, if the fraud or misrepresentation intended to influence a person does not actually lead them to enter into the contract, it does not constitute fraud. Consequently, such a contract would be deemed valid and not voidable.



Example:

John purchases a cannon from William, who conceals its defects with a metal plug. Despite not examining the cannon, John buys it and later it bursts when used.



The court holds that no fraud occurred because John would have purchased the cannon regardless of the deceptive plug since he did not inspect it beforehand. Therefore, he was not deceived or defrauded by the plug.

 
 

Remedies Available to the Defrauded Party


(i) Avoidance of the Contract: The defrauded party has the option to avoid the performance of the contract altogether.



(ii) Specific Performance with Modifications: Alternatively, the defrauded party can insist on the contract being performed, but with necessary modifications to place them in the same position they would have been if the false statement had been true.



(iii) Suit for Damages: The defrauded party may also choose to file a suit seeking damages for the losses incurred due to the fraud.


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