Definition of Fraud

Section 17 of The Indian Contract Act defines Fraud: “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 of his agent, or to induce him to enter into the 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.

Explanation.— Mere silence as to facts 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 silence to speak, or unless his silence is, in itself, equivalent to speech.

According to Section 19 of the Indian Contract Act, 1872:

“When consent to an agreement is caused by fraud, the contract is voidable at the option of the party whose consent was so caused.”

Essential Elements of Fraud

  1. There must be a false representation of fact.
  2. The representation must be made knowingly, or without belief in its truth, or recklessly.
  3. The representation must be made with an intent to deceive.
  4. The innocent party must have relied on the false statement.
  5. The party must have suffered some loss or damage as a result.

Examples of Fraud

1) A sells a horse to B, falsely stating that the horse is sound, knowing that it has a disease. → Fraud.

2) A intentionally conceals the insolvency of his firm while taking a loan from B. → Fraud.

3) A promises to deliver 100 bags of rice knowing he has no stock and never intends to supply. → Fraud.

4) A, intending to deceive B, falsely tells B that his car is brand new, knowing it is five years old, and thereby induces B to buy it. This is Fraud under Section 17(1).

5 ) C sells a house to D. C knows the foundation is severely cracked and deliberately covers the cracks with cement and paint to prevent D from discovering the defect. This is Fraud under Section 17(2).

6) E borrows a large sum of money from F on the promise of starting a business and repaying within a year, but at the time of making the promise, E has no intention of starting the business or repaying the money. This is Fraud under Section 17(3).

Important Case Law

1. Derry v. Peek (1889) 14 App Cas 337 (HL)

Facts:

A tramway company issued a prospectus stating it had authrized to run tramways with steam power. In truth, permission from the Board of Trade was not yet granted. The plaintiff invested based on this statement. Later, permission was refused by Board of Trade.

Issues:

Whether the company’s directors were guilty of fraudulent misrepresentation by making a false statement in the prospectus.

Analysis:

The House of Lords held that to constitute fraud, there must be proof of false representation made knowingly, or without belief in its truth, or recklessly. A mere belief in the truth of the statement, even if wrong, is not fraud.

Judgment:

The court ruled that there was no fraud because the directors honestly believed their statement to be true. It was a case of misrepresentation, not fraud.