FRAUD
The term ‘fraud’ may mean an intentional deliberate or willful mistreatment with a view to deceive others. Such misstatement must be material for the formation if the contract.
According to section 17 “fraud means and includes any of the following acts committed by a party to a contract or by one with his connivance or by his agent with intend to deceive another party thereto or his agent or to induce him to enter into the contract.”
(a) a suggestion as to a fact of that which is not true by one who does not believe it to b true.
(b) An active concealment of fact by one having knowledge or belief of the fact.
(c) A promise made without any intention to performing it.
(d) Any other act fitted to deceive.
(e) Any such act or omission as the law specially declares to be fraudulent.
Thus, in other words fraud is an intentional misrepresentation of facts in order to deceive the other party or to induce him to enter into the contract.
ESSENTIAL ELEMENTS OF FRAUD
The essential elements of fraud are:
(1) The fraud must have been committed by a party to the contract or with his connivance or by his agent. Fraud committed by a stranger does not affect the validity of the contract.
Example: a company issued a prospectus giving some false information. On the faith of this false statement ‘A’ purchased some shares of the company. Subsequently, when he came to know the fact he wanted to avoid the contract. Held, he can do so because the false statement made by the directors, the agent of the company.
(2) The fraud must have been committed upon the other party or his agent. If it is committed upon a stranger, not related to the contract, it will not amount to fraud.
Example: ‘A’ fraudulently informed B that he had a new VCR in excellent condition and he wanted to sell it. B gave this information to C. Upon this information C purchased that VCR from A. Later on it was discovered that the VCR was old and in deteriorated condition. He wanted to set aside the contract. He could not do so because C had purchased the VCR relying upon the information give by B who is a stranger to the contract and not a party to the contract or an agent o A.
(3) The following acts may amount to fraud.
As suggested by the definition of fraud given in section 17, the following acts may be regarded as acts of fraud:-
(a) Suggestion as to an untrue fact. If a person knowing that the statement made by him is untrue or believes it not to be true, it will be taken as a fraud on his part.
Example: A says to B that the coat is made of wool, though he knows that the statement made by him is not true. Believing on the statement, B purchases the coat. It is a fraudulent act and B can avoid the contract when he comes to know the truth.
(b) Active concealment of fact. If a party to the contract actively conceals the fact, it will amount to fraud. Active concealment menans when the party takes positive steps to prevent the information from reaching the other party. In other words, when a latent defect was concealed by a party, it will amount to fraud.
Example: A was legally entitled to succeed to an estate at the death of his relative B. B died. C, a third person knowing the death of B prevented the information from reaching A and C induced A to sell him his interest in the estate. It will amount to fraud. There is an active concealment of fact by C as he prevented the information from reaching A.
(c) A promise made without any intention of performing it. If a party at the time of entering into a contract has no intention of performing his promise under the contract, it will be taken as a fraud.
Example: A purchased certain goods from B. he does not have any intention to pay the price for the goods. It is the fraud on the part of A.
(d) Any other act fitted to deceive. The sub-section covers all those cases which cannot appropriately be covered by any other section. There are no set of methods to deceive. It covers all tricks, dissembling and other unfair ways which are used to cheat others. If any act of party is to cheat others, it will amount to fraud.
(e) Such act or omission which the law specifically declared to be fraudulent. If any act or omission on the part of the party has been declared fraudulent by any law for the time being, it will be treated an act of fraud.
(4) The act must have been committed with an intention to deceive. It is an important element of fraud. The act must be committed by a party with the intention to deceive the other party or to induce the other party to enter into the contract.
Example: A intending to deceive B falsely represented that 5 tons of ice was manufactured daily in his factory, and thereby induced B to purchase the factory. In fact, the production in the factory was only 3 tons daily. The contract is said to be entered into by obtaining the consent of B by fraud.
(5) The act must have in fact deceived the other party. If one party has committed an act to deceive the other party but the other has not been actually deceived, it will not taken as fraud. ‘a deceit which does not deceive is not fraud.’ In other words, it means that such other party must have relied upon the fraudulent statement of the party to the country and have actually deceived.
Example: a company’s prospectus contained a statement that p was a director of the company. A person B who never heard of P, applied for shares and he was allotted shares as requested. In fact P was not a director of that company. B wanted to set aside the contract on the ground of mis-statement the prospectus. It was held that B could not do so because untrue statement contained in the prospectus actually did not deceive Bas he was not actually deceived by mis-statement
(6) Plaintiff must have suffered. If the party to be deceived has not suffered some loss of money or money’s worth, there is no fraud at all. “There is no fraud without damages.” The loss may be in some other tangible detriment capable of assessment.
EFFECTS OF FRAUD
The party whose consent to the contract is obtained by fraud has the following right against the other party-
1 The contract is void able at the option of the aggrieved party and as such the aggrieved party must rescind the contract and may 1. ask for damages suffered because of the non-fulfillment of the contract or 2. ask for the restitution. But the aggrieved party has no right to set aside the contract in the following circumstances-
2 If he affirms or ratifies the contract even after he comes to know the fraud. Such affirmation may be express or implied.
3 Where the parties cannot be restored to original position such as in case of marriage contract.
4 Where the third party has acquired the right in the property for consideration and in good faith.
5 Where silence amounts to fraud, the aggrieved party cannot rescind the contract if he had the means to discover the truth by ordinary diligence.
6 Where after coming to know the fraud, the party has not rescinded the contract within the reasonable time.
7 He may insist for the performance of the contract and may ask the other party to put him in a position in which he would have been if the fraud had not been committed. In other words he may affirm the contract and may insist upon its performance. He may also compel the other party to put him in the position in which he would have been if the fraudulent statement had been true.
Example: A fraudulently informs B that his house is free from encumbrance. B thereupon buys the estate. The estate is subject to mortgage. B may either avoid the contract or may compel him on its being carried out and the mortgage debt redeemed.
MISREPRESENTATION
Misrepresentation means a false statement made innocently i.e., without any intention to deceive others. A party which makes the statement believes it to be true but actually it is not so. It includes non-disclosure of a material fact or facts not intend to deceive the other party.
Example: a while selling his watch tells B that it was made in switcher land. Honestly believes that that watch is made in switcher land. B purchased the watch. However, B found later on that the watch was made in India. A is guilty of misrepresentation.
Section 18 defines misrepresentation as “misrepresentation means and includes-
1. The positive assertion; in a manner not warranted by the information of person making it, of that which is not true, though he believes it to be true, or
2. Any breach of duty which without and intent to deceive, gains an advantage to the person committing it, or anyone claiming under him by misleading another to his prejudice or to the prejudice of anyone claiming under him, or
3. 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.
ACTS OF MISREPRESENTATION
According to the definition given in section 18, the following act may be regarded as misrepresentation-
1. Positive statement. When a person makes a positive statement of fact without any reasonable basis or ground believing it to be true though it is not true this act amounts to misrepresentation.
Example: A tells B that his scoter goes 40 km in a litre of petrol. A believes it to be true. However the scooter goes only36km.in a litre.A is guilty of misrepresentation.
2. Breach of duty. When a person commits a breach of duty on account of which he gains and the party loses, it is an act of misrepresentation provided; it is not with an intention to deceive the other party. This clause covers all those cases where the person making the statement has a duty to disclose all material facts which he knows but he does not disclose it but innocently.
Example: A while taking a life insurance policy states his age to be of 25 years, believing it to be true. Actually his age was 28. the life insurance corporation issues a policy in favor of A charging a rate of premium lower than what it should have charged for the actual age of A. there is misrepresentation by A.
3. Causing mistake by innocent misrepresentation. When a person induces other person, even innocently to make a mistake regarding the subject matter of the agreement, he has committed a misrepresentation. It covers cases of concealment or suppression of facts, because by concealing or suppressing the material fact, the other party may be induced to commit a mistake regarding the subject matter.
Example: A says to B, an intending purchaser of his house, that his house is in perfect condition. He did not know that foundation of his house is very weak and some of walls got big cracks, B thereupon buys the house. A is guilty of misrepresentation.
LEGAL RULES AS TO MISREPRESENTATION
On the analysis of the legal definition of misrepresentation-
(1) The misrepresentation must be of material facts. A mere expression of opinion is not misrepresentation. Material fact means a fact which may influence the decision to be taken by the other party to the contract.
(2) The misrepresentation must be false, but the person making it honestly believes it to be true. If he believes it not to be true, it is a fraud and not misrepresentation.
(3) The misrepresentation must have been addressed to the other party who is misled by it.
(4) The misrepresentation must induce the other party to enter in to the contract.
(5) Change of the circumstances in between the period of making the contract and finalization of contract must also be communicated to other party; otherwise, it will amount to misrepresentation.
(6) It should be without any intention of deceiving the other party.
(7) It need not be made directly to the plaintiff. A wrong statement of fact made to a third person with the intention of communicating it to the plaintiff, amounts to misrepresentation.
EFFECTS OF MISREPRESENTATION
In case of misrepresentation, the aggrieved party has two alternate courses to him – (i) he can rescind the contract, treating the contract as voidable; or (ii) he may affirm the contract and insist that he shall be put in the position in which he would have been, if the representation made had been true. Misrepresentation dies not entitle the aggrieved party to claim damages by way of interest or otherwise for expenses incurred.
Example: ‘A’ innocently in good faith tells B that his T.V. set is made in Japan. B, thereupon buys the T.V. set. However it comes out to be an Indian make. A, is guilty of misrepresentation. B may either avoid the contract or may insist on its being carried out. In the latter case, B may either ask for replacing the set by Japanese make set or may keep the Indian make set and claim the difference in price between that set and Japanese make set.
MISTAKE
Mistake means erroneous belief about something. It is an innocent which leads one party to misunderstand the other. In such a case, there is consent at all because the two parties do not understand the same thing in the same sense.
Mistakes may be of two types:
(1) mistake of law
(2) mistake of fact
MISTAKE OF LAW
Mistake of law may be as regards Indian law or as regards foreign law.
(a) Mistake as to Indian law. It is a well settled rule of law that ignorance of law is no excuse. I the mistake is about the law of land, the contract cannot be avoided on the ground that he had done a particular act in ignorance of law. Everyone in the country is supposed to know the law of the country of which he is a citizen.
(b) Mistake as to foreign law. Mistake as to foreign law has the same effect as a mistake of fact and therefore, the contract can be avoided. It is because nobody is expected to be versed with the foreign law.
MISTAKE OF FACT
Mistake of fact may also be classified as (a) bilateral mistake, and (b) unilateral mistake.
BILATERAL MISTAKE
According to section 20, “where both the parties to an agreement are under a mistake as to a matter of fact, essential to the agreement, the agreement shall be void.” Thus a mistake shall be termed as bilateral if the following two conditions are satisfied –
(i) The mistake must be of both the parties. If only one party is at mistake, the contract cannot be avoided, on the ground of mistake.
(ii) The mistake of fact must be about the essential fact to the agreement i.e., it must affect the substance of the whole consideration. It shall be essential to the agreement if the mistake frustrates the object of the agreement.
TYPES OF BILATERAL MISTAKE
Bilateral mistake may be (a) as to subject matter, and (b) as to possibility of performance.
(1) Mistake as to subject matter. Where both the parties to agreement are working under a mistake relating to the subject matter, the agreement is void. Such type of mistake may be of following types:
(i) Regarding existence of the subject matter. Where at the time of making the agreement the subject matter does not exist but the parties are not aware of the non existence of the subject matter. In such cases, the agreement is void. Example: A agreed to purchase the house of B which is in the village. At the time of making the agreement, the house had collapsed. The agreement shall be void as neither party was aware of the existence of the house at the time of making the contract.
(ii) Regarding identity of the subject matter. It usually arises that the two parties understand the contract differently as regards its subject matter. One party intends to deal in one thing and the other intends to deal in other.
Example: A has two scooters one yellow and the other red. He made a contract to sell his yellow scooter with Y. Y who was aware of only his red scooter agreed to purchase. Here is the mistake as to identity of subject matter. The agreement is void as there is no consent at all.
(iii) Regarding title to the subject matter. If the seller is selling a thing which he is not entitled to sell or if the purchaser purchases a thing which already belong to him, but the fact is not known to either party, the agreement will be void. Example: A took a lease of fishery from B. both of them believed that the fishery belonged to B, but in fact, it belonged to A. held, that the agreement was void.
(iv) Regarding quality of the subject matter. A bilateral mistake as to quality of subject matter will render the agreement void. Example: A offered to purchase a race horse from B, a horse dealer. B accepted the offer believing it to be for the cart horse. Here the agreement is void as both the parties are mistaken about the quality of the subject matter.
(v) Regarding quantity of the subject matter. When both the parties are under a mistake as to quantity of the subject matter, the agreement is void.
(vi) Regarding price of the subject matter. When the both parties are under a mistake as to the price of the subject matter, the agreement is void.
(2) Mistake as to possibility of performance. If the existence of certain circumstances are essential for the performance of the contract, the contract will be void if the circumstances change without the knowledge of both the parties or where the parties or where the parties were ignorant about the non existence of such circumstances at the time of agreement.
UNILATERAL MISTAKE
When in a contract, only one party is under a mistake about the value or quality of the subject matter or in expressing or understanding the terms or the legal effect of the agreement, the mistake is unilateral mistake. Under section 22 the contract is not void on the ground that one party is under the mistake and taken a wrong judgment. The contract is quite valid and enforceable.
Example: A sells his house to B for an intended sum for Rs.45000. By mistake, he makes an offer for Rs.40000. A cannot plead mistake as a defense.
EXCEPTIONS:
A unilateral mistake cannot generally be taken as a ground for avoiding the contract. But in certain cases, when consent of the party is given by a party under an error or mistake which was caused by fraud or misrepresentation of the other party and the error is so fundamental that goes into the root of the contract. Such a mistake may be mistake as to the nature of the contract or as to the identity of the person.
(1) Mistake as to the nature of the contract. If a person enters into a contract and without any fault of his own makes a mistake about the very nature of the contract, the contract shall be void. It may be because of blindness, illiteracy or fraudulent misrepresentation as to the nature of contract.
Example : M, an old man of poor sight, endorsed a bill of exchange thinking that it was a guarantee as told by the other party. Held there was no contract on the ground that the mind of the signer did not accompany the signature.
But if the party knew the general character of the agreement failed to read all its terms, the contract will not be void.
(2) Mistake as to the identity of the contracting party. When a person intends to contract with a
particular person, but finds that he has contracted with some other person, the contract is void as to the identity of the party. But there is no mistake as to the identity of person if in all those case where the party intends to contract with any person who enters to shop.
Example: B was accustomed to deal with J, whose business was unknown to B, was purchased by K. B placed an order in the name of J for the supply of certain goods. K, knowing that B intends to deal with J, supplies the goods with communicating the fact that the business had changed hands. Held, there was not contract as B had no intention to enter into contract with K.
EFFECTS OF MISTAKE ON VALIDITY OF CONTRACT
In case of a bilateral mistake as to fact, the contract is void and cannot be enforced at the option of either party to the agreement. Under a void contract, any benefit received by a party under the contract will have to be returned.
In case of unilateral mistake, generally the agreement is valid and enforceable. Thus, a unilateral mistake does not affect the validity of the contract. But where the unilateral mistake defeats the true consent of the parties, the agreement will be void.
