What is the Meaning of Fraud in Contract Law?

What is the meaning of fraud? Under the Indian Contract Act, 1872? This topic is discussed here. The fraud in law is to cheat the other person. And the fraud meaning in Hindi is (Dokha).

The term fraud can be derived under section 17 of the Indian Contract Act, 1872. Let's discuss this in detail.

Definition of Fraud

The definition of fraud has been defined under section 17 of Indian Contract Act, 1872 as, "Fraud means and includes any of the following acts committed by a party to a contract, or with his connivance, or by his agents, with intent to deceive another party thereto his agent, or to induce him to enter into a contract."

1) the suggestion as 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 without 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.

Thus, the above-mentioned act committed by any party to the contract amounts to fraud, and such contracts are voidable in nature at the option of another party who has been deceived.

Example: A sells a horse to B in which A knows that the horse is unsound, A does not say anything to B about the horse's unsoundness. This would amount to fraud.

Essentials of Fraud

1. There should be a suggestion as a fact

First of all, one of the parties should make suggestions a relevant fact to the other party concerning the contract. Such, facts in the contract should not be known to the other party.

2. The suggested fact should not be true

The suggestion made concerning the fact should not be true and should not be known to the other party.

3. Active concealment of fact

The active concealment of fact means if any party to the contract hides the material fact from the other party which should be known to the contracting party.

4. Promise should be made without the intention of performing it

The one-party makes a promise to perform the contract, but he has the intention not to perform the contract agreed with the other party. Entering into a contract without the intention of performing it amounts to fraud.

5. The suggestion should be made to deceive the other party

Any suggestion made by one party to another in contract, to deceive the other party, makes the false suggestion of fact about the contract.

Mere Silence Does Not Amount To Fraud

To constitute fraud in the contract, the party should represent untrue facts, which will amount to fraud. But silence amount facts does not amount to fraud.

Example: A sells a statue by auction to B which is partially damaged and cannot see easily. A says nothing to B about the partial damage of the statue. This does not amount to fraud.

The explanation provided under section 17 of contract act as, mere silence as to facts about contract 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 silent to speak, or unless his silence is considered as similar to speech.

In Shri Krishan v/s Kurukshetra University, 1976, Shri Krishan was a law student pursuing in LL.B. 1st year and has no regular attendance in the class. He did not mention his short attendance in the admission form of the examination. Later, before the examination, the law department found that Shri Krishan has short attendance and the university wanted to cancel the candidature of the candidate to appear in the examination on the ground of fraud.

It was held that there was no fault on behalf of the candidate. The court found that the candidate has just kept silent as to certain facts and this does not amount to fraud.

Exceptions

1. Duty to speak

There is no legal provision which states that every person has a duty to disclose all the facts which are known to him. But, we can say it is a general duty of a person to disclose facts that are not or might not be known to the other party.

In a contract, if one party does not disclose material facts relating to the contract to the other party and this affects loss to the other party or failure in the performance of the contract then it would be amount to fraud.

So, here keeping silent will amount to fraud.

2. When silence is equivalent to speech

Sometimes keeping silent or hiding certain facts may be capable of creating an impression as to the existence of a certain situation. In this case, keeping silent amounts to fraud.

Effect of Fraud

According to section 19 of the Indian Contract Act, 1872, if any consent to the contract is obtained by fraud, then the contract is voidable at the option of the party whose consent has been obtained using fraud.

The deceived party has the option to make this contract either valid or void.

Referred Books:

• Law of Contract - Bare Act 2021 Edition Professional
• The Indian Contract Act 1872 Bare Act 2021 Edition
• Law of Contract & Specific Relief Dr Avtar Singh Latest Edition-2020
• Pollock & Mulla - The Indian Contract Act, 1872
• CONTRACT Paper  I - By R.K. Bangia [Edtion 2019 - 2020]
• CONTRACT Paper-II - By R. K. Bangia
• NOTES ON INDIAN CONTRACT ACT 1872: BEST NOTES FOR LAW STUDENTS