Contact Act. Fraud and Misrepresentation explained by the Supreme Court.

Rengali Hydro Electric Project v. Giridhari Sahu, (2019) 10 SCC 695. Civil Appeal 8071/2010 decided on 12 September 2019. Justice Sanjay Kishan Kaul and Justice K.M.Joseph 

Judgment Link:
https://main.sci.gov.in/supremecourt/2008/16520/16520_2008_11_1502_16692_Judgement_12-Sep-2019.pdf

The Indian Contract Act, 1872. Section 15 defines ‘coercion’. Section 17 defines ‘fraud’. Section 18 defines “Misrepresentation”. ‘Undue influence’ is defined under Section 19 (see below for full extracts)

Paragraph 43. A perusal of the definition of the word “fraud”, as defined in Section 17 of the Contract Act, would reveal that the concept of fraud is very wide. It includes any suggestion, as a fact, of that which is not true, by a person who does or does not believe it to be true.

It may be contrasted with Section 18(1) of the Contract Act which, inter alia, defines “misrepresentation”. It provides that it is misrepresentation if a positive assertion is made by a person of that which is not true in a manner which is not warranted by the information which he has. This is despite the fact that he may believe it to be true.

In other words, in fraud, the person who makes an untruthful suggestion, does not himself believe it to be true. He knows it to be not true, yet he makes a suggestion of the fact as if it were true.

In misrepresentation, on the other hand, the person making misrepresentation believes it to be true. But the law declares it to be misrepresentation on the basis of information which he had and what he believed to be true was not true.

Therefore, the representation made by him becomes a misrepresentation as it is a statement which is found to be untrue.

Fraud is committed if a person actively conceals a fact, who either knows about the fact or believes in the existence of the fact. The concealment must be active.

It is here that mere silence has been explained in the Exception which would affect the decision of a person who enters into a contract to be not fraud unless the circumstances are such that it becomes his duty to speak. His silence itself may amount to speech.

A person may make a promise without having any intention to perform it. It is fraud.

The law further declares that any other act fitted to deceive, is fraud.

So also, any act or omission, which the law declares to be fraudulent, amounts to fraud. Running as a golden trend however and as a requirement of law through the various limbs of Section 17 of the Contract Act, is the element of deceit.

A person who stands accused of fraud be it in a civil or criminal action, must entertain an intention to commit deception. Deception can embrace various forms and it is a matter to be judged on the facts of each case.

It is, apparently, on account of these serious circumstances that fraud has on a legal relationship or a purported legal relationship that the particulars and details of fraud are required if pleaded in a civil suit or a proceeding to which the CPC applies.

Sections 15, 16, 17 and 18

15. “Coercion” defined.—“Coercion” is the committing, or threatening to commit, any act forbidden by the Indian Penal Code (XLV of 1860), or the unlawful detaining, or threatening to detain, any property, to the prejudice of any person whatever, with the intention of causing any person to enter into an agreement.

Explanation.—It is immaterial whether the Indian Penal Code (XLV of 1860), is or is not in force in the place where the coercion is employed.

16. “Undue influence” defined.—(1) A contract is said to be induced by “undue influence” where the relations subsisting between the parties are such that one of the parties is in a position to dominate the will of the other and uses that position to obtain an unfair advantage over the other.

(2) In particular and without prejudice to the generality of the foregoing principle, a person is deemed to be in a position to dominate the will of another—

(a) where he holds a real or apparent authority over the other or where he stands in a fiduciary relation to the other; or

(b) where he makes a contract with a person whose mental capacity is temporarily or permanently affected by reason of age, illness, or mental or bodily distress.

(3) Where a person who is in a position to dominate the will of another, enters into a contract with him, and the transaction appears, on the face of it or on the evidence adduced, to be unconscionable, the burden of proving that such contract was not induced by undue influence shall lie upon the person in a position to dominate the will of the other.

Nothing in this sub-section shall affect the provision of Section 111 of the Indian Evidence Act, 1872 (I of 1872).

Illustrations

(a) A, having advanced money to his son, B, during his minority, upon B’s coming of age obtains, by misuse of parental influence, a bond from B for a greater amount than the sum in respect of the advance. A employs undue influence.

(b) A, a man enfeebled by disease or age, is induced, by B’s influence over him as his medical attendant, to agree to pay B an unreasonable sum for his professional services. B employs undue influence.

(c) A, being in debt to B, the money-lender of his village, contracts a fresh loan on terms which appear to be unconscionable. It lies on B to prove that the contract was not induced by undue influence.

(d) A applies to a banker for a loan at a time when there is stringency in the money market. The banker declines to make the loan except at an unusually high rate of interest. A accepts the loan on these terms. This is a transaction in the ordinary course of business, and the contract is not induced by undue influence.

17. “Fraud” defined.—“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—

(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.

Illustrations

(a) A sells, by auction, to B, a horse which A knows to be unsound. A says nothing to B about the horse’s unsoundness. This is not fraud in A.

(b) B is A’s daughter and has just come of age. Here, the relation between the parties would make it A’s duty to tell B if the horse is unsound.

(c) B says to A—“If you do not deny it, I shall assume that the horse is sound”. A says nothing. Here A’ s silence is equivalent to speech.

(d) A and B, being traders, enter upon a contract. A has private information of a change in prices which would affect B’s willingness to proceed with the contract. A is not bound to inform B.

18. “Misrepresentation” defined.—“Misrepresentation” means and includes—

(1) the positive assertion, in a manner not warranted by the information of the person making it, of that which is not true, though he believes it to be true;

(2) any breach of duty which, without an intent to deceive, gains an advantage to the person committing it, or any one claiming under him, by misleading another to his prejudice, or to the prejudice of any one claiming under him;

(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.