Name: Kunal Saxena
Enrolment No. : A8111120043
Programme: B.A.LL.B (Hons)
Semester: 1st, Section: A
Batch: 2020-2025
TOPIC: FRAUD&MISREPRESENTATION IN CONTRACTS
ACKNOWLEDGMENT
I would like to express my deepest gratitude to all those who provided me to complete
this report. I would like to earnestly acknowledge the effort and time given by my subject
teacher Dr Diksha Mishra who has supported and guided me in completing my
assignment. Her sincerity, vision and motivation deeply inspired me.
I owe my deep gratitude to Mr JP Yadav (HOD) for his extensive support and
professional ethics and providing such an opportunity for assignment and project work. I
would like to thanks to all the people who supervise and support me in any manner.
INDEX
What Are Contracts?
What is Misrepresentation?
Kinds of Misrepresentation:-
Instances which will not Constitute Misrepresentation:-
What is Fraud?
Elements of Fraud:-
Kinds of Fraud’s under Section-17 ICA:-
Silence as Fraudulent:-
Duty to speak:-
Silence amounts to speech:-
What Are Contracts?
Before we start talking about our real topic we should know what a contract is, Contracts
are the heart agreements between people to do something in exchange for something they
receive. It can be as simple as agreeing to mow your neighbour’s lawn for some money
or it could be something as complex as a company buying shares in a subsidiary in
exchange for a neat and tidy packet of millions of dollars. Contracts can be for any
services. Contracts are important because they make life simple for us and are essential
for the commercial and overall growth of society. They facilitate transactions, business,
employment and make our lifestyles enjoyable by allowing us access to a range of
facilities.
What is Misrepresentation?
Misrepresentation denotes an innocent but incorrect statement on which the parties rely
before making the agreement. Before parties enter into a contract they like to judge a
contract on its merits and assess information about the contract before assessing it, for
example, if you are a farmer wishing to buy land for growing crops you would like to
know the productivity level of the land. If the land is highly productive you will be
willing to buy it or even pay a high price for it, if it lies in the scale of average
productivity to less productive land then you might not be willing to buy it or at best buy
it at the land which is lesser than the first land. Now the seller of the land under a genuine
mistake confuses the productivity of the land you intend to buy with one which is not so
productive in that case it is the seller who is at fault and not you. The law will protect
your interest because your mistake was because of the misrepresentation of the seller and
not yours. You will have the option of not going ahead with the contract. When contracts
can be set aside at the option of one party they are voidable contracts.
The Legal Definition of Misrepresentation is covered by- Section 18 of ICA,1872:-
(1) The positive assertion, in a manner not warranted by the information of the person
making it, of that which is not true, though he believes it to be true;
(2) Any breach of duty which, without an intent to deceive, gains an advantage to the
person committing it, or anyone claiming under him, by misleading another to his
prejudice of anyone claiming under him;
(3) Causing, however incorrectly, a party to an agreement, to make a mistake as to the
substance of the thing which is the subject of the agreement.
Kinds of Misrepresentation:-
Largely there are three kinds of misrepresentation if we break up the definition of
Misrepresentation:
A. An innocent assertion about the subject matter:-
The positive assertion, in a manner not warranted by the information of the person
making it, of that which is not true, though he believes it to be true; A good example is
the case of, Oceanic Steam Navigation Co vs Soonderdas Dharamsey:
B. Breach of duty to disclose the correct position:-
Any breach of duty which, without an intent to deceive, gains an advantage to the
person committing it, or anyone claiming under him, by misleading another to his
prejudice or the prejudice of anyone claiming under him. See, for example, Oriental
Bank Corporation vs. John Fleming:
C. An incorrect but innocent statement:-
Causing however innocently a party to an agreement to make a mistake as to the
substance of the thing which is the subject of the agreement.
Farrand vs Lazarus: is an example demonstrating the same.
Instances which will not Constitute Misrepresentation:-
A mere expression of opinion will not constitute Misrepresentation.
Where a misrepresentation has been made but where the misrepresentation or incorrect
representation of fact has not induced the parties to enter into an agreement.
There will be no misrepresentation where the misrepresentation can be verified by
ordinary diligence.
What is Fraud?
Fraud unlike misrepresentation implies the desire to enter contracts by deliberately making
false statements or deliberately painting an incorrect picture on which the person entering into
the contract relies on and enters into the contract. Whereas Misrepresentation is giving
information incorrectly but innocently, fraud refers to the process of inducing a person to
contract with the intent to deceive, i.e. incorrectly and intentionally.
Fraud has been defined in Section 17 of the Act and covers the situation where a person
knowing a piece of information to be incorrect or knowingly exploiting a situation to his/her
benefits induces the opposite party to enter into a contract.
The legal definition of Fraud under Section-17 of ICA:-
"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 the contract :
I. The suggestion, as to a fact, of that which is not true, by one who does not believe it to
be true;
II. The active concealment of a fact by one having knowledge or belief of the fact;
III. A promise made without any intention of performing it:
IV. Any other act fitted to deceive;
V. Any such act or omission as the law specially declares to be fraudulent.
Elements of Fraud:-
Remember in order to avoid a contract by fraud there must be 'intent to deceive' which
translates into two essentials:
A statement or assertion must be made which is incorrect and the person making that
assertion should himself or herself should know it to be incorrect at the time of making that
statement.
The statement should have induced or been a part of the reason to have entered into the
contract.
Kinds of Fraud’s under Section-17 ICA:-
Section 17 categorizes fraud into five heads these are:-
I. The suggestion that a fact is true when it is not true and the person making it knows it is
not true:-
This statement can be broken down to indicate three requirements;
o The suggestion that a fact is true
o When it is not true and the
o The person making it knows it is not true.
An example which corresponds to these three elements is given below:-
{A is a salesman at a jewellery shop. B comes to the shop to buy some gold jewellery. A shows
a Necklace to B and tells her It is a 24 K Gold Necklace whereas, in reality, the necklace is a
silver necklace with Gold plating and A knows the necklace is not made of Gold. Based on A's
statement B purchases the necklace.}
It must be observed therefore that the knowledge and complicity of the person in knowing the
correct position is important in fraud. This is an underlining element of fraud and has been
judicially addressed in the case of Derry vs. Peek
This kind of fraud includes contracts induced by lies and deliberately false statements or people
deliberately lying to induce people to enter into contracts.
II. Active Concealment of a fact by a person who has knowledge or belief of the fact:-
Suppose in the situation above, B came to the showroom and asked for a necklace. A
shows her a necklace, B likes the necklace and says "I want to purchase this Gold
necklace". A secretly removes the silver tag from the necklace and does not tell B that
the necklace is not a Gold necklace.
In this case, B has actively concealed information and lets A continue with a mistaken
belief. This would constitute fraud.
Situations where a person deliberately conceal facts so as to hide the true subject matter
in the contract is a good example of frauds in this category.
III. Promise made without any intention of performing it:-
Let's twist the facts once again. For example, the said necklace had already been sold
and B does not inform the same to A. She accepts advance from A against the necklace
and promises to get it delivered to her after getting the finishing done, at the same time
planning to run away with the money. B unsuspectingly deposits the advance. A
absconds with the money.
In this case even while entering into a contract B had no intention of performing it and
the only intention she had in mind was to cheat A of her money.
IV. Any other act fitted to deceive:-
A knowingly puts up a board over a counter which reads “all jewellery 24K gold”,
whereas the jewellery is the counter is only gold plated.
V. Any such act or omission as the act specially declares to be fraudulent:-
This form of fraud is attracted when the law specifically terms an act to be a fraud.
Silence as Fraudulent:-
Silences amount to fraud or not has been set out in the explanation to Section 17. The
explanation elucidates the position by saying that silence by itself is not fraud except where,
There is a duty to speak.
Silence itself amounts to speech.
Duty to speak:-
The law says that a person is not bound to disclose each and everything he knows when
entering into a contract. There are two places when there arises a duty to speak.
I. Contracts of Utmost Good Faith (Uberrima Fides):-
These are contracts where a person because of the relationship he shares with the other person
or because of certain circumstances is bound to disclose all the relevant facts which would be
material to the contract to the person with whom s/he is entering into a contract with. A good
example of this is the contract of insurance, where the insurer relies on the declaration made by
the insured.
II. Partial Communication:-
Though the law does not impose a duty to otherwise disclose all the facts, but if a person
chooses to disclose the fact or set of facts s/he must disclose it fully. A partial communication
or a half-truth is fraudulent as it frames a wrong picture. The American case of J.C.Corp vs.
Cohen is a good example of communicating partially.
III. Change of Circumstances:-
When a representation is made and it is true at the time of making, but there is a material
change of circumstances, which the person knows that would affect the agreement and
deliberately does not communicate where s/he is bound to communicate, there would be a
fraud by silence. A good illustration on the point is the case of With vs. Flanagan.
Silence amounts to speech:-
Simply because a person did not disclose all the facts or he was merely silent, does not
constitute fraud. But when silence can itself be read to connote an answer or a statement it
constitutes fraud. Let us consider this consider the statutory illustration and a variation of it to
understand the same.
The illustration to Explanation of Section 17, which gives an example of what will not
constitute fraud by silence is as follows:
A sells by auction ta B a horse which A known to be unsound A says nothing to B about the
horse's unsoundness. This is not fraud in A."
In the illustration above a is merely silent, and his silence in any way is not an assertion of the
health of the horse.
Contrast this with illustration in the statute, B says to A, " I do not deny it, I shall assume the
horse is sound". A says nothing. Here A's silence is equivalent to speech.".
In this illustration A's silence is an assertion or a statement on the soundness of a horse. Such
deliberate silence which translates to speech constitutes fraud in the eyes of law.
