Fraud

In one minute

Fraud is a deliberate act meant to deceive a party into a contract. The law lists five acts. They include saying what you do not believe, hiding a fact on purpose, and making a promise with no intention to keep it.

The deceived party may cancel the contract or insist it be performed as promised. Mere silence is not fraud unless there is a duty to speak. In exams, the five acts and the silence rule are the marks. In real life this is the law behind false sales claims and loan scams.

Legal provision

• Section 17: fraud means and includes five acts. A party does them, or they are done with his connivance, or by his agent. The intent must be to deceive another party or his agent, or to induce him to enter into the contract.
• Section 17(1): suggesting as a fact that which is not true, by one who does not believe it to be true.
• Section 17(2): active concealment of a fact by one having knowledge or belief of the fact.
• Section 17(3): a promise made without any intention of performing it.
• Section 17(4): any other act fitted to deceive.
• Section 17(5): any act or omission that the law specially declares to be fraudulent.
• Explanation to section 17: mere silence about facts likely to affect the other's willingness to contract is not fraud. It is fraud if the circumstances make it the person's duty to speak, or if his silence is in itself equivalent to speech.
• Section 19: a contract caused by fraud is voidable at the option of the deceived party. He may instead insist on performance and on being put in the position he would have held if the statements had been true.

Meaning and definition

Fraud needs two things: one of the five acts, and an intent to deceive or to induce the contract. A careless but honest statement is not fraud. It may be misrepresentation.

The old maxim fraus omnia vitiat (fraud spoils everything) states the policy. The law will not let a person keep the gain of his own deceit.

1. 1. Was one of the five acts done by a party, with his connivance, or by his agent? (section 17)No: not fraud. Silence alone is not an act unless there is a duty to speak.
2. 2. Was it done with intent to deceive, or to induce the contract? (section 17)No: not fraud. It may be misrepresentation (section 18).
3. 3. Did it cause the other party's consent? (explanation to section 19)No: the contract is not voidable.
4. 4. Result (section 19)The contract is voidable at the deceived party's option. He may instead insist on performance. The diligence exception does not protect active fraud.

Detailed explanation

Step 1: the five acts

Each act has its own example.

• False suggestion as fact (17(1)). A seller tells a buyer, "This gold chain is 22 carat". He knows it is 18 carat.
• Active concealment (17(2)). The Act's illustration (d) to section 19: B discovers a vein of ore on A's estate, hides it, and buys the estate at an undervalue.
• Promise without intention to perform (17(3)). Meena borrows Rs 50,000 promising to repay by December, planning to leave the town. This is fraud.
• Any other act fitted to deceive (17(4)). Winding back a odometer before selling a vehicle.
• Act specially declared fraudulent by law (17(5)). For example, acts that other laws call fraudulent.

Step 2: intent

The act must be done with intent to deceive, or to induce the other party to enter the contract. Without intent there is no fraud.

Step 3: silence

The Explanation states the rule, and the illustrations show it. Mere silence is not fraud, with two exceptions.

• A duty to speak arises from the circumstances, such as a close relation.
• The silence is in itself equivalent to speech.

Step 4: effect and remedies

The contract is voidable under section 19. The deceived party may cancel, or insist on performance and on being put in the position he would have held if the statements had been true.

The exception to section 19 protects a party who could have found the truth with ordinary diligence. It covers misrepresentation and fraudulent silence, but not active fraud. Fraud may also support a suit for the tort of deceit, which Derry v. Peek was.

Don't confuse: silence that is fraud and silence that is not

Many students think that hiding a fact is always fraud. The Explanation says silence alone is not.

Situation	Fraud?	Act's illustration
Seller at an auction says nothing about an unsound horse	No. Mere silence	17(a)
A father says nothing about his horse's unsoundness to his daughter who has just come of age	Yes. The relation creates a duty to speak	17(b)
Buyer says, "If you do not deny it, I shall assume the horse is sound". Seller stays silent	Yes. Silence is equivalent to speech	17(c)
A trader knows of a price change and tells no one	No. He is not bound to inform	17(d)

Common mistakes

• Writing that all silence is fraud. Mere silence is not, unless there is a duty to speak.
• Forgetting the intent. Fraud needs intent to deceive or to induce the contract.
• Saying the contract is void. It is voidable.
• Giving the diligence exception to a party guilty of active fraud. It does not apply.

Apply it

Leading case laws

• Derry v. Peek (1889)

  Facts. Directors of a tramway company said in a prospectus that the company had the right to use steam power. The right needed the Board of Trade's consent, which was later refused except for certain portions. A shareholder sued the directors for deceit.

  Principle. Fraud is proved when a false statement is made knowingly, or without belief in its truth, or recklessly. An honest belief defeats the claim, even if it lacked reasonable grounds. The Lords said that "there must be proof of fraud, and nothing short of that will suffice".

  Why it matters. It sets the mental element of fraud. The Contract Act's wording in section 17(1), "by one who does not believe it to be true", is consistent with this.

How to write this answer in the exam

Key points to remember

• Fraud is one of five acts done with intent to deceive or induce the contract (section 17).
• Mere silence is not fraud, unless there is a duty to speak or silence equals speech.
• The contract is voidable at the deceived party's option (section 19).
• The deceived party may insist on performance and on being put in the position as if the statements had been true.
• The diligence exception does not protect active fraud.

Quick self-test

Related topics

• Concepts of Free Consent
• Misrepresentation
• Mistake
• Void and Voidable contracts