Fraud

Broken down: who, with what intention, and which five acts

Who

The act must be committed by a party to the contract, or with his connivance, or by his agent. Connivance means knowingly allowing it to happen. So a fraud by a complete stranger, in which neither party had any hand, is not fraud within section 17, although it may found a case of mistake.

With what intention

Either with intent to deceive the other party or his agent, or to induce him to enter into the contract. This is the mental element, and it is what separates section 17 from section 18. In fraud the maker knows, or does not believe, that what he says is true.

The five acts

(1) The suggestion, as a fact, of that which is not true, by one who does not believe it to be true. The plain lie. Note the drafting: it is enough that the maker does not believe it to be true. He need not know it is false; recklessness, saying it without caring whether it is true, is within the clause.

(2) The active concealment of a fact by one having knowledge or belief of the fact. Not silence, but doing something to hide it. Painting over a crack, turning back an odometer, arranging a viewing at a time when the damp does not show.

(3) A promise made without any intention of performing it. A promise is a statement about a present state of mind, so a person who promises while intending not to perform is stating something false about his own intention now.

(4) Any other act fitted to deceive. A residuary clause for ingenuity the drafters could not anticipate. "Fitted to deceive" means apt or calculated to deceive.

(5) Any such act or omission as the law specially declares to be fraudulent. A pointer to other statutes, for example provisions of the Transfer of Property Act 1882 and the Insolvency law that declare particular transfers fraudulent.

The Explanation: silence, and its two exceptions

The rule is that mere silence is not fraud. There is no general duty to disclose. Two exceptions.

(a) Where it is the duty of the person keeping silence to speak. This arises in two situations. First, contracts of utmost good faith, uberrimae fidei, where one party alone has the material facts: insurance above all, and also contracts of family settlement and contracts for the sale of land as to defects in title. Second, where the parties stand in a fiduciary or confidential relationship, so that trust is reposed.

(b) Where the silence is, in itself, equivalent to speech. Where what is left unsaid gives a positive false meaning to what is said. If a buyer says "I shall assume the horse is sound unless you tell me otherwise" and the seller says nothing, the silence speaks. Equally, a half truth, or a statement true when made that the maker knows has since become false, falls here.

Fraud distinguished from misrepresentation

The distinction that carries the marks in this module.

The exception point is the subtle one and it is examined. The Exception to section 19 says the contract is not voidable if the party whose consent was so caused "had the means of discovering the truth with ordinary diligence", but by its own words it applies where consent was caused "by misrepresentation or by silence, fraudulent within the meaning of section 17". So a party who told an active lie cannot say the victim should have checked.

A worked example

Farhan sells a flat to Gita. Consider five versions of what he says and does.

• He tells her the building has no seepage, knowing that two flats flood every monsoon. Section 17(1): the suggestion as a fact of what is not true by one who does not believe it. Fraud. The contract is voidable at Gita's option under section 19, and she may also sue in tort for deceit. Farhan cannot plead that she could have asked the neighbours, because the Exception to section 19 does not protect active fraud.
• He says nothing about the seepage, and she does not ask. The Explanation applies: mere silence is not fraud. A sale of a flat is not a contract of utmost good faith as to its physical condition, and there is no fiduciary relationship.
• He replasters and repaints the affected wall the week before the viewing so the stain cannot be seen. Section 17(2): active concealment by one having knowledge of the fact. Fraud.
• He tells her truthfully in March that the society has sanctioned no repair levy, and learns in April that it has, and says nothing before the sale closes in May. His silence gives a false meaning to what he said, so it is equivalent to speech within the second exception. Fraud.
• He promises to clear the outstanding society dues before handover, having already decided not to. Section 17(3): a promise made without any intention of performing it. Fraud, and note that a mere later failure to perform would only be a breach; what makes it fraud is the intention at the time of the promise, which Gita must prove.

Remedies for fraud

The injured party has a choice, and the second paragraph of section 19 spells out the second limb.

1. Rescind the contract. Treat it as at an end and recover what was given, subject to section 64's requirement to restore benefits received.
2. Affirm the contract and insist on performance, and that he be put in the position in which he would have been if the representations made had been true.
3. Sue for damages in the tort of deceit, which is available for fraud and not for innocent misrepresentation.
4. Where sued on the contract, set up the fraud as a defence.

Loss of the right to rescind. By affirmation with knowledge of the fraud, by lapse of time, by the intervention of third party rights acquired for value without notice before rescission, and where restitution has become impossible.

What it does NOT mean

"Any false statement is fraud." Only one the maker does not believe to be true, or which is made with intent to deceive. An honest mistake is misrepresentation under section 18.

"Silence is fraud if the fact was important." The Explanation says the opposite. Silence is not fraud unless there is a duty to speak or the silence is equivalent to speech.

"Fraud makes the agreement void." It makes the contract voidable at the option of the party defrauded.

"A broken promise proves fraud." It does not. Section 17(3) requires that there was no intention of performing it when it was made, and that has to be proved.

"The victim should have checked, so the fraud does not count." That answer is available against misrepresentation and fraudulent silence, under the Exception to section 19. It is not available against an active lie.

Quick revision

• s.17: fraud is any of five acts by a party, with his connivance, or by his agent, with intent to deceive or to induce the contract.
• The five: (1) suggestion of untruth by one who does not believe it; (2) active concealment; (3) a promise with no intention of performing; (4) any other act fitted to deceive; (5) anything the law specially declares fraudulent.
• Explanation: mere silence is NOT fraud, unless (a) there is a duty to speak (utmost good faith, such as insurance; or a fiduciary relation) or (b) the silence is equivalent to speech (half truths, and facts that have changed since a true statement).
• Effect: voidable, s.19. Remedies: rescind; or affirm and be put in the position as if the representation were true; or damages in deceit; or plead it as a defence.
• Exception to s.19 (means of discovering the truth with ordinary diligence) applies to misrepresentation and fraudulent silence, not to active fraud.
• Recklessness counts: the clause says does not believe it to be true, not knows it to be false.

Test yourself

1. Define fraud and list the five acts in section 17. 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 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 it; a promise made without any intention of performing it; any other act fitted to deceive; and any such act or omission as the law specially declares to be fraudulent.

2. Is silence fraud? Not as a rule. The Explanation to section 17 says mere silence as to facts likely to affect willingness to contract is not fraud. It becomes fraud in two cases: where the circumstances make it the duty of the person keeping silence to speak, as in contracts of utmost good faith such as insurance or where the parties are in a fiduciary relationship; and where the silence is in itself equivalent to speech, as with a half truth or a statement that was true when made and has since become false to the maker's knowledge.

3. Distinguish fraud from misrepresentation. The difference is the maker's state of mind. In fraud he does not believe his statement to be true, or intends to deceive; in misrepresentation he believes it to be true. Both make the contract voidable under section 19, but damages in deceit lie only for fraud, and the Exception to section 19 about means of discovering the truth protects a defendant who innocently misrepresented, or was fraudulently silent, and not one who told an active lie.

4. A seller promises to clear outstanding dues and never intended to. Is that fraud? Yes, under section 17(3), which makes a promise made without any intention of performing it a fraud. The intention not to perform must have existed when the promise was made, and it is for the party alleging fraud to prove it; a mere subsequent failure to perform is a breach of contract and no more.

5. What are the remedies of a party defrauded? He may rescind the contract, restoring benefits received under section 64; or affirm it and insist under the second paragraph of section 19 that it be performed and that he be put in the position he would have been in had the representations been true; or sue for damages in the tort of deceit; or, if sued, plead the fraud as a defence. The right to rescind is lost by affirmation with knowledge, by delay, by impossibility of restitution, and by third party rights acquired for value without notice.