As stated in section 17 of the Indian Contract Act, of 1872, fraud is defined as any act done by a party to a contract, or by his agents, to deceive or trick the other party, his agent, or to induce him to enter into the contract.

This post will help you understand fraud under section 17 of the Indian Contract Act, of 1872. The upcoming sections will cover the meaning and definition of fraud, the legal effect of fraud, and the effect of fraud in a contract.

Did You Know? A contract induced by a misrepresentation is not voidable under Section 17, but it may be voidable under Section 18 of the Indian Contract Act.

What is Fraud Under the Indian Contract Act, of 1872?

Fraud is defined as and includes any of the following actions that a contracting party, his associate, or his agent participates in to mislead or falsify another party, or his agent, to agree. In other words, fraud is defined as the willful misrepresentation of facts with the intent to deceive and trick someone.

Under section 17 of the Indian Contract Act, 1872, fraud is defined as any act committed by a party to a contract, or with his connivance (willingness to allow), or by his agents, to deceive or trick the other party, his agent, or to induce him to enter into the contract.

Also Read: What is the Capacity to Contract under Indian Contract Act?

List of Criteria that Fall Under Fraud

Various criteria exist for circumstances that amount to fraud, including:

• When someone declares something as fact that he does not think to be true, then that amounts to fraud. For instance, Mohan is aware that Rohan cheats. However, Mohan tells Priya that Rohan is a trustworthy individual with whom she can conduct business. This is a case of fraud by Mohan.

• Any behaviour that the law expressly defines as fraudulent.

• The active concealment of a fact by one having knowledge or belief in the fact.

• Any other act intended to deceive.

• A promise made without any intention of performing it.

Essential Elements of Fraud

The essential elements of fraud are outlined below:

• The false representation must be made knowingly, or

• Without the conviction that it is true, or

• Made carelessly without knowledge of its truthfulness.

What Does Active and Passive Concealment Mean?

The two types of concealments are: active and passive. The two are distinct from one another. Active concealment is hiding a material truth that ultimately results in fraud, as opposed to passive concealment, which is simply remaining silent about the relevant facts.

The Effect of Fraud on a Contract

According to Section 19, the legal effect of fraud in a contract whose consent was gained through fraudulent means is that it is voidable with the permission of the other party. The person who was misled has two options. He can either cancel the contract to the extent that it is not being performed, or he can confirm the contract and demand that he be placed in the same situation as he would have been in if the representations were true.

He is responsible for paying back the benefit he obtained under section 64 upon revocation, and may be entitled to damages. When stating the effects of fraud in a contract, the amount to be paid back includes all actual loss that has been incurred directly from the transaction covered by the fraud, including consequential loss, and not just loss that was reasonably anticipated.

Section 19 of The Indian Contract Act

When a party enters into a contract that includes fraud, as per Section 19 of The Indian Contract Act, the contract becomes voidable at the option of the party whose consent was so caused. A party to the contract, whose consent was obtained by fraud or false representation, may, if he considers it correct, insist that the contract shall be performed. This is because he shall be put in the same position in which he would have been if the representations made were true.

Also Read: Why is Independent Contractor Agreement (ICA) Important?

A Promise Made Without the Intention of Performing it

A promise is not intended to be performed if it is made with no intention of fulfilling it on either party's end. This is because it is made with the sole objective of preventing the other party from dealing with or entering into a contract with the other party. These types of fraud are covered by Section 17 of the Indian Contract Act.

Any subsequent conduct or representation is not taken into account for this purpose. Instead, it must be proved that the promisor had no intention of keeping the promise when it was made under Section 17 of the Contract Act. For instance, purchasing items without intending to pay the price, can be considered a promise made without the intention of performing it.

Mere Silence is Not Fraud

Under the Indian Contract Act of 1872, mere silence is not considered fraud. Section 17 of the Act, which deals with "fraud," states that a contract induced by fraud is voidable at the option of the party defrauded. However, for a contract to be declared voidable due to fraud, it must be shown that a false representation was made with the intent to deceive. Generally, a failure to disclose information or a mere silence is not considered fraud under the Indian Contract Act, of 1872, but if the circumstances of the case make it necessary for the person keeping silent to speak, or unless his silence is, in itself, equivalent to speech, fraud can be considered.

Why Mere Silence is not Considered Fraud?

Unless the defendant is required to talk and conceal the details of a certain transaction or trade, simple silence or failure to disclose facts would not amount to wrongdoing. Therefore, where the circumstances of the case are such that the individual must speak and inform the other party of the facts of the case, but they do not, or the party's silence is comparable to expression, that individual's silence alone is considered fraud. The contract's other party is deceived, and as a result, sustains losses.

In the absence of free consent, contracts are voidable under Section 19. The exception to this in this section provides that if a party agreed to the conditions of the contract through mere silence or false representation, the agreement will not be voidable if the party could have discovered the facts through reasonable care. In this case, silence or false representation must be considered fraud under Section 17.

Exceptions to "Mere Silence Is Not Fraud" or When Silence is Fraud

"Mere silence is no fraud" has certain limits, and there are some exceptions to it. These are the instances when silence will be considered fraud. These are listed below:

• The obligation to speak: If it is the duty of the person who is silent to speak, then remaining silent amounts to fraud.

• Where Silence Can Be Deceiving: When a person is aware that his silence will be interpreted as speech but chooses to remain silent, he is committing fraud.

• Half-truths: A person can choose not to reveal a fact, but once he begins speaking, he must tell the whole truth.

• Marital Facts: Non-disclosure of material facts relating to marriage parties has been held to constitute fraud.

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What Happens to the Part Falsely Claiming Fraud?

Even if a false statement was made, the party falsely claiming fraud could not be said to have been defrauded. This is because he knew the facts or had the means to know them. Also, a contract cannot be cancelled based on a minor and insignificant misstatement or non-disclosure of any facts. In a case law, namely Janakiamma v Raveendra Menon, where the petitioner knew what was in her father's Will, the partition of property following the deaths of the father and mother was not set aside on the grounds of fraud for neglecting to reveal the contents of the Will, and no new partition was mandated.

Conclusion

The evasion or hiding of a fact by one who has knowledge or belief of the fact to be true, or a promise made with no intention of performing it, is considered fraud under the Indian Contract Act. As a result, simply being silent about certain material facts affecting an individual's desire to enter into a contract would not be regarded as fraud. However, if their silence can be considered speech, or if the individual must inform the other party of the facts and events, their silence would constitute fraud.

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