"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 to 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 with 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."
The essentials of fraud are:
I. False statement of fact [Sec. 17(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.[Lakshmi Dhar v. Sachit Kumar, (1969) 73 C.W.N. 1001.]
Thus, if while taking a policy of marine insurance, the i sured communicates to the insurers a letter from the master of his vessel mentioning that in the master's opinion that the anchorage of the place of destination of the vessel is safe and good, there is only an expression of opinion and not a statement of fact, which could constitute fraud.[Anderson v. Pacific Fire and Marine Insurance Co., (1872) L.R. 7 C.P. 65.
If, on the other hand, 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.[Ram Bai v. Life Ins Corporation of India, A.I.R. 1981 M.P. 69.]
Similarly, if A intending to deceive B, falsely represents that five hundred maunds of indigo are made annually at factory, and thereby induces B to buy the factory, the contract is voidable at the option of B.[Illustration (a) to sec. 19.]
Representation as to untrue facts may be made by positively stating certain facts or by conduct. In Edington v. Fitzmaurice, [(1885) 29 Ch. 459.]a company was in great financial difficulties and needed funds to pay some pressing liabilities. The company raised the amount by issue of debentures. While raising the loan, the directors stated that the amount was needed by the company for its development, purchasing assets and com buildings. It was held that the directors had committed a fraud.
To constitute fraud, there should be 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 untrue impression on the mind of the other.
Mere silence, however, as to facts is no fraud. Explanation to sec. 17, in this connection, incorporates the following provision:
"Mere silen e 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."
A contracting party is not obliged to disclose each and everything to the other party. If a person is to sell his goods, he is under no duty to disclose the defects in his goods.
If he makes false statement as to the quality of his goods, t would be fraud, but if he m rely keeps silence as regards the defects in them, there is no fraud.
In case of sale of goods, the rule is caveat emptor. le., buyear beware, which means that it is the duty of the buyer to be careful while purchasing the goods, and there is no implied condition or warranty by the seller as to the quality or fitness of the goods for any particular purpose. [Section 16 Sale of Goods Act, 1930.]
If A sells, by auction, to B, a horse which A knows to be unsound and A says nothing to B about the horse's unsoundness. This is not fraud in A. [Illustration (a) to section 17.]
Similarly, if 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.]
In Keates v. Lord Cadogan, [(1851) 10 C.B. 591.]A let his hous to B which he knew was in ruinous condition. He also knew that the house is going to be occupie by B immediately. A did not disclose the condition of the house to B. It was held that he had committed no fraud.
In Shri Krishan v. Kurukshetra University, [A.l.R. 1976 S. . 376; 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 the Supreme Court that there was no fraud by the candidate and the University had no power to withdraw the candidature of the candidate on that account.
Exceptions
Although as a general rule mere silence or non-disclosure of acts do not amount to fraud, but in some exceptional cases keeping silence may be deemed to be an act of deception. Explanation to sec. 17, whi h mentions the rule the t mere silence is not fraud also mentions the following two exceptions:
When there is duty to speak, keeping silence is fraud,
When silence is, in itself, equivalent to speech, such silence is a fraud.
Duty to speak
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 ca e amounts to fraud.
When there is a duty to disclose facts, one should do so rather than to remain silent. By remaining silent, one may be responsible for creating a false impression in the mind, of the other.
Certain contracts are contracts uberrima fides, i.e., contracts of utmost goods faith. In such a case, it is supposed that the party in whom good faith is reposed would make full disclosures and not keep silent.
Suppression of truth in such cases is equivalent to suggestion of falsehood.
Withholding the facts, which ought to be is closed, is fraud.
Contracts of insurance are contracts uberrima fides (of u most good faith). Since some of the facts may be in the sole knowl dge of the insured, he must make full disclosures to the insurer.
In P. Sarojam v. L.I.C. of India,[A.I.R. 1986 Ker. 201] the assured was suffering from a serious heart ailment not only when the proposal for the insurance of his life was made, but also for several yea s prior to that. The assured gave false answers to the questions in the proposal form so as to conceal his ailment, and ind ced the L.I.C. to accept the proposal. He died of heart ailment wit in a few months after the date of the policy. It was held that in vie of the false answers to the questions given by the assured in the proposal form, the contract of insurance was vitiated, and the L.I.C. was, therefore, entitled to repudiate the policy and decline the payment of the claim thereunder. It was also observed that the mere fact that the Medical Officer of the L.I.C. had certified the ass red at the time of the proposal as of good health was not of much consequence.
Even in case of insurance contracts, where duty to disclose is generally there, the non- disclosure of the facts, which are not material and have no bearing on the risk undertaken by the insurer, does not render the agreement voidable. In BHAGWANI BAI V. L.I.C. OF INDIA,[A.I.R. 1984 M.P. 126.] it has been held by the M.P. High Court that the non-disclosure of information about the la sed policies by assured has no bearing on the risk undertaken by the insurer, and the same, therefore, does not amount to fraudulent misrepresentation so as to entitle the insuranc Corporation to repudiate the contract on that ground.
When there is a duty to disclose, non-disclosure of material facts amounts to fraud. In Kiran Bala v. Bhaire Prasad Srivastava, [A.I.R. 1982 M.P. 242.] first marriage of the appellant, Kiran Bala, had been annulled on the ground that she was of unso nd mind at the time of that marriage. he was married to the respondent, Bhaire Prasa Srivastava, the second time. The facts of the annulment of the first marriage on the ground that she was an idiot, and also that she was under treatment for mental ailment were 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 the respondent was, therefore, annulled by a decree or nullity under section 12(1)(c) of the Hindu Marriage Act.
In Rajinder Singh v. Pomilla,[A.I.R. 1987 Delhi 285.]the Delhi High Court h s held that premarital status of a party to a marriage was a material fact, which must be disclosed. In that case, the husband, w o was a divorcee, did not disclose the fact of is previous marriage to his wife and other relatives. It was held that the consent to marria e had been obtained by fraud and, therefore, the marriage was liable to be annulled under section 12 (l)(c) of the Hindu Marriage Act.
If in some cases the disclosure is required by a statute then also there aris s a duty to speak. According to section 57, Indian Easements Act, 1882, for instance, the grantor of a license is bound to disclose, to the licensee such defects in the property licensed which can harm the licensee or his property and of which he is aware but the licensee Is not.
Similarly, if the usage or Custom of trade requires the disclosure of known defects, their non-disclosure would be equivalent to a positive assertion that the defects do not exist in the article.[Janes v. Bowden, (1813) 4 Taunt. 847.]
In case of fiduciary relationship between the parties also, there is a duty to disclose all the facts which have a bearing on the contract.
Speaking half-truth may also amount to misrepresentation as regards those facts which have not been disclosed. Withholding a part of the information may be enough to convey a false impression and it amounts to fraud. Thus, if the cleaner of clothes makes a customer to sign a document orally telling him that the terms exempt the cleaner from liability for damage to beads and sequins, but in fact the document contains a clause giving him exemption from any damage howsoever arising, this is fraud.[Curtis v. Chemical Cleaning and Dyeing Co., (S951) 1 KB. 805.]
Duty to disclose changes If a statement is true when made, but subsequently becomes false by the change of circ mstances, there is a duty to disclose the change, before the other party acts upon it. If t e change is not notified to the other party, it would amount to fraud.
In With v. O'Flangan[(1936) Ch. 575; (1936) 1 All. E.R. 727.]a medical practitioner (Dr. O'Flangan) started negotiation in January, 1934 for the sale of his practice. He stated that his average practice was w rth £ 2,000 per annum. The contract for the sale of practice was signed on May 1, 1934, but by that time the position of his practice had changed as his practicehad fallen considerably owing to his illness and consequent absence fr m practice. These changed circumstances were not disclosed to the purchasers of practice and when they took charge, they found that the practice was practically non-existent. They brought an action for the rescission of the contract on the ground that the changed circumstances were not communicated to them. It was held that the representation made in this case to induce the other party to the contract to enter into the contract was a continuing one and it was the duty of the vendor to notify the change of circumstances to the pur haser if the same occurred before the contract was signed. Under these circumstances, the plaintiffs were entitled to rescind the contract.
Silence being equivalent to speech-- Sometimes keeping silent as to ertain facts may be capable of creating an impression as to existence of a certain situation. In such a case, silence amounts to fraud.
For exampl , 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. In this case, the relation between the parties would make it A's duty to tell B if the horse is unsound.[Illustration (b) to sec. 17]
Means of discovering the truth- Even if, in any case, the silence is fraudulent, but the other party could have discovered the truth by ordinary diligence, he cannot avoid the contract. In this connection, the provision in the Indian Contract Act [Exception to section 19.] is as under:
"If such a 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 v. Kurukshetra University, It was held that there was no fraud in this case as the candidate had just kept silent as to certain facts and further, the university authorities could, have discovered the truth with ordinary diligence.