SECTION 17 OF INDIAN CONTRACT ACT 1872 – ‘FRAUD’

Section 17 of the Indian Contract Act, of 1872 deals with fraud which is a deception intended for personal gain. It is an illegal and unethical way to gain at the expense of others either by intentionally hiding important information or by giving false statements. It takes away the free

Home Blogs SECTION 17 OF INDIAN CONTRACT ACT 1872 – ‘FRAUD’ By JusCorpus Blogs December 6, 2023

INTRODUCTION

Section 17 of the Indian Contract Act, of 1872 [1]deals with fraud which is a deception intended for personal gain. It is an illegal and unethical way to gain at the expense of others either by intentionally hiding important information or by giving false statements. It takes away the free consent of the parties under a contract which is given under Section 14 of the Indian Contract Act, 1872.[2]

DEFINITION OF FRAUD

Section 17 of the Indian Contract Act, of 1872 defines fraud as, “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-

The suggestion, as a fact, of that which is not true, by one who does not believe it to be true;
The active concealment of a fact by one having knowledge or belief of the fact;
A promise made without any intention of performing it;
Any other act fitted to deceive;
Any such act or omission as the law specially declares to be fraudulent.”[3]

EXPLANATION

Fraud means intentionally misguiding someone about a certain fact and getting the benefit of the same. The aggrieved party can decide if they want to continue with the contract or file a case of fraud against the party who has committed it. The clauses under this section talk about fraud which is done in different ways-

DISTORTED FACT

Section 17 (1)[4] of the Indian Contract Act explains that when one party of the contract states or makes the other party believe that fact, which in reality is untrue, then that party is said to be committing fraud. Both parties should know the facts of the contracts and they should not be misrepresented.

In the case Shiv Kant Yadav v Indian Oil Corporation (2007)[5], an applicant for the dealership of petroleum products, misrepresented his income intentionally in the application form. When it was got to know about it the company the letter issued to him was cancelled. The court declared that since the applicant did not truly represent his income, he has committed fraud and the company is at the discretion whether to cancel the letter or not, since in the case of fraud the contract is voidable at the end of the aggrieved party.

ACTIVE CONCEALMENT

Section 17 (2)[6] of the Indian Contract Act states that when there is an active concealment of any fact i.e. when any of the parties of a contract had the duty to disclose some material fact or facts to the other party, but it does not do the same then in that case it is said to be active concealment which makes the contract voidable at the end of the aggrieved party, who can file a case of fraud against the fraudulent party.

In the case of Ningawwa v Byrappa Shiddappa Hirenknrabar (1968)[7], in this case, the appellant’s husband included the two plots of land in the village which was held by fraud and without the knowledge of the appellant and since it was a fraudulent misrepresentation of the contents of the document, the transaction was voidable at the part of the aggrieved party. The court held that the concealment of facts of the contract is considered fraud. Similarly, in the case of P.L. Raju vs. Dr Nandan Singh (2005)[8], the defendant kept the plaintiff unaware of the pending litigation of the property of which they had a contract, therefore the act of the defendant was considered fraud and the contract was held nullified.

WHEN SILENCE IS FRAUD AND EXCEPTIONS TO MERE SILENCE

When the parties under a contract had the duty to speak (contracts uberrima fides) and he doesn’t then that arises as a case of fraud. For example- If a man promises his friend to sell his horse for rupees ten thousand, he must say that the horse is of unsound mind, but if he doesn’t tell that then it is said that the man has committed fraud against his friend.

When silence is equivalent to speech:

For instance, if the party proposing explicitly says that if the acceptance is not received by him within a speculated period, then he will consider the offer accepted. Therefore, in this, if the promise doesn’t reply, then it is binding by the contract. It won’t come under the ambit of fraud.

If a party to the contract does not give its accent and has been silent about the contract without any approval or denial, it cannot be considered as acceptance or denial of the proposal. Mere listening to the facts and being silent about those things cannot be termed as fraud.

PROMISE IN BAD FAITH

Section 17 (3)[9] of the Indian Contract Act states that whenever an act is promised to be done with the intention of not doing the same that act is said to be a fraudulent act, for instance, in the case of Clough v London and N.W. Railway Company (1871)[10], a person purchasing goods without the actual intention of paying the price for those goods was held liable by the court in the case of fraud. Similarly, in the case of DDA v Skipper Construction Company (P) Ltd (2002)[11], the court held that since the builder knew that there wasn’t enough space to construct three buildings, he took the money and promised to perform the contract without any intention of doing so, he must be held liable for fraud which was caused by inducement.

DEVILRY INTENTION

Section 17 (4)[12] of the Indian Contract Act explains that any act that is done with the mischief intention to fraud the other party of the contract then that act is considered a fraudulent act under the act and in the case of Hungerford Investment Trust Ltd v Turner Morrison and Company Ltd (2009)[13], Hungerford who claimed to be a member of Turner Morrison company made an allegation against them of mismanagement at the court of law to intentionally showing himself aggrieved and deceiving the other party. The court held that the plaintiff has tried to violate the public and private confidence and goodwill of the defendant’s company and is held liable for constructive or legal fraud by misleading the other.

INFRINGEMENT OF LAW

Section 17 (5) [14]of the Indian Contract Act states that any act which is done or any act which is omitted to be done and is against the law of the land under the contract, then that act is declared to be a fraudulent act. The acts or the omission of the acts which explicitly state that those particular actions or inaction are not lawful but are still performed by individuals, then they are liable under fraud. For example, it has been seen in the cases under the Companies Act that people use fraudulent ways to contract and take over their companies. Also, it has been observed that during the transferring of property, many fraudulent ways are used to save the cost that has to be paid, for instance, individuals tend to save stamp duty by showing the property to be less valued which is kind of a fraudulent act under this section.

DAMAGES UNDER FRAUD

When there is fraud committed by one of the parties in the contract then it is on the other party if it wants to continue with the contract or turn it to be void i.e. the contract is voidable at the end of the aggrieved party. It is at the discretion of the aggrieved party if it wants to get back to the position it was in before the fraud happened to them.

DIFFERENCE BETWEEN FRAUD AND MISREPRESENTATION

Fraud is an intentional statement of false facts under the contract by various means like stating wrong facts etc. whereas misrepresentation which is discussed under Section 18 of the Indian Contract Act[15] states that when a person who has stated some fact is himself in disbelief about a certain fact, without the intent to deceive and did innocent mistake.

Fraud can be held liable under tort law but simple misrepresentation cannot be held liable under tort about which it has been talked under Section 75 of the Indian Contract Act, 1872.[16]
Under the misrepresentation liability like restitution, damages, etc. arise whereas in the case of fraud, the contract can be held voidable at the option of the aggrieved party.
In the case of fraud, the false statement is made intentionally whereas, in the case of misrepresentation, it is made due lack of belief in its truth.

CONCLUSION

Fraud under the Indian Contract Act in short is the act that involves false statements, intentional deception, and concealment of facts. It renders a contract voidable at the option of the aggrieved or defrauded party.

Author(s) Name: Shriti Agrawal (Symbiosis Law School, NOIDA)

References:

[1] Indian Contract Act 1872, s 17

[2] Indian Contract Act 1872, s 14

[3] Indian Contract Act 1872, s 17

[4] Indian Contract Act 1872, s 17(1)

[5] Shiv Kant Yadav v Indian Oil Corporation (2007) 4 SCC 410: AIR 2007 SC 1534

[6] Indian Contract Act 1872, s 17(2)

[7] Ningawwa v Byrappa Shiddappa Hirenknrabar AIR 1968 SCC 956, 958

[8] P.L. Raju vs Dr. Nandan Singh (2005) 5 ALD 402

[9] Indian Contract Act 1872, s 17(3)

[10] Clough v London and N.W. Railway Company (1871) LR 7 Exch 26

[11] DDA v Skipper Construction Company (P) Ltd (2000) 10 SCC 130

[12] Indian Contract Act 1872, s 17(4)

[13] Hungerford Investment Trust Ltd v Turner Morrison and Company Ltd (2009) 2 CHN 330

[14] Indian Contract Act 1872, s 17(5)

[15] Indian Contract Act 1872, s 18

[16] Indian Contract Act 1872, s 75