Fraud and recklessness of contract

CONTRACT-    

According to the section 2(h) of Indian contract act 1872, an agreement which is enforceable by law is known as contract.

One of the essential of valid contract is “free consent” which is defined under section 13 of Indian contract Act 1872.

SECTION 13 – when two or more person are said to be consent when, they agree upon the same thing in the same sense.

There are some causes which affect the “free consent” which is defined under section 14 of Indian contract act 1872.

SECTION 14 – consent is said to be free when it is not caused by:

(1)  Coercion

(2)  Undue influence

(3)  Fraud

(4)  Misrepresentation

(5)  Mistake

FRAUD: According to the section 17 of Indian contract act 1872, fraud means and includes of any of the following acts committed by a party to a contract or 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.  

Means that the act of fraud must have been committed within intention to deceive another party. No course of action arises where is fraud without damage and damage without fraud.

Fraud Was proved when it was shown that’s false representation has been made:

(1)  knowingly

(2)  without belief in its truth

(3)  recklessly whether it is true or false

Recklessness means carelessness. If a person gives a statement without having information whether it is true or false to the other party for believing such statement that is called recklessness of contact. Statement made without belief in the truth would include statement made recklessly.

According to section 17 of Indian contract act 1872, there are some essential of fraud:

(1)  There should be false statement of fact by person who himself does not believe the statement to be true.

(2)  The statement should be made with a wrongful intention of deceiving another party and inducing them into enter into an contract.

(3)  The other party must have suffered the loss.

(4)  There must be any of the acts of fraud mention in section 17 be performed.

FALSE STATEMENT OF FACT

SECTION 17(1):

If the statement of fact is not true then it is amount to fraud.

Ex: if a person who is aged over 60 years and thus beyond insurable age, deliberately makes a false statement that his age is 48 years in order to take out an insurance policy, it amounts to fraud and the insurer is entitled to avoid the policy.

MERE SILENCE IS NO FRAUD    

Mere silence as to fact likely to affect the willingness of a person to enter into a contract is not a fraud. Unless the circumstances of the case are such that, regard being had to ,it is the duty of the person keeping silence to speak or unless his silence is in itself equivalent to speech.

A contracting party is not obliged to disclose each and everything to the other party.

KEATES V. LORD CADOGAN

In this case A let his house to B which is knew was in ruinous condition. He also knew that the house is going to be occupied by B immediately. A did not disclose the condition of house to B. it was held that he had committed no fraud.

EXCEPTION OF MERE SILENCE IS NO FRAUD

(1)    DUTY TO SPEAK : If it is the duty of the person keeping silence to speak, keeping silence in such a case amounts to fraud. Where there is a duty to disclose facts, one should do so rather than to remain silent by remaining silent ,one may be responsible for creating a false impression in the mind of other.

CONTRACT OF GOOD FAITH (UBERIMA FIDES): Contracts of good faith, in utmost good faith the party in whom good faith is reposed would make full disclosurement and not keep silent. It is the duty of party to disclose the material facts.

EX: contract of insurance.

P.J.CHACKO V. CHAIRMAN LIC OF INDIA

In this case the insured had undergone an operation for thyroid, a major operations four years prior to the date of proposal made him without disclosing the fact while obtaining the insurance policy. He took policy on 6th July 1987 and within six month on 21st February 1987 he died. Then court held that insured does not disclose the all material fact of contract so it is amount to fraud.

(1) MARITAL STATUS:

Non disclosurement of material facts relating to parties to marriage has been held to constitute fraud.

(2)    CHANGE OF CIRCUMSTANCES:

Sometime a representation is true when it is made, but it may an account of a change circumstances, become false when it is actually acted upon by other party. In such circumstances, it is the duty of the person who made the representation to communicate the change of circumstances.

(3). SILENT BEING EQUIVALENT TO SPEECH:

Sometime keeping silent as to certain Facts may be capable of creating an impression as to existence of certain situation. In such a case silent amount to fraud.

EX: if B say to A “if you do not deny it, is hall assume that horse is sound”. A says nothing here A’s silence is equivalent to speech.

(4). HALF TRUTH:

Even when a person is under no duty to disclose a fact, he may becomes guilty of fraud by non disclosure if he voluntarily disclose something and then stop half the way. Court said that a person keep silence, but if he speaks a duty arises to disclose the whole truth.

SECTION 17(2): ACTIVE CONCEALMENT OF A FACT BY ONE HAVING KNOWLEDGE OR BELIEF OF THE FACT:

When there is active concealment of a fact by one having knowledge or belief of the fact that Amount to a fraud.

SECTION 17(3): PROMISE MADE WITHOUT ANY INTENTION TO PERFORM IT:

When a person makes a promise, there deemed to be an undertaking by him to perform. If there is no such intention when contract being made, it amount to fraud.

EX:

Man takes a loan without any intention to repay it.

SECTION 17(4) : ANY OTHER ACT FITTED TO DECEIVE.

Any other act fitted to deceive is also fraud. Its include such cases of fraud which would not come in purview the earlier three clauses.

SECTION 17(5): ANY ACT OR OMISSION AS THE LAW SPECIALLY DECLARES TO BE FRAUDULENT:

Fraud also includes any such act or omission as the law specially declare to be fraudulent. In some cases law requires certain duties to be performed, failure to do which is expressly declared as fraud.

WRONGFUL INTENTION

In order to constitute fraud it is necessary that a person should intentionally.

DERRY V. PEEK

In this case director of company issued a prospectus stating that they had got the authority to run tramways with steam or mechanical power instead of animal power . director honestly believed that the board of trade, who had to accord its sanction for the same would do so as a matter of course. But the board refused the sanction and company had to wound up .who taken share in the company brought an action for the tort of fraud. It was held by the court that since statement had not been made with intention to deceive . so there was no fraud.

IF THE OTHER PARTY HAS THE MEANS TO KNOW THE CORRECT POSITION AND OUGHT TO HAVE KOW THE TRUTH, THERE IS NO FRAUD:

KAMALKANT V. PRAKASH DEVI 

Kamalkanth filed a suit against his mother Prakash Devi and some others. Seeking cancellation of a trusted on the ground that his signature to it were obtained by fraud that it was a general power of attorney. In this case court held that plaintiff was an educated man and had all the means to know the contents of documents so there is no fraud.

IF A PERSON MIND HAS NOT BEEN INFLUENCED BY THE FALSE STATEMENT WHEN HE ENTER INTO THE CONTRACT IS NO FRAUD:

SMITH V. CHADWICK :

In this case it was held that if the prospectus of a company contains a false statement that a particular person would be on the board of director, but the plaintiffs mind is not influenced by the state he cannot claim relief.

EFFECT:

In the case of fraud the contract was voidable at the option of of the party whose consent has been so obtained. According to the section 19 of Indian contract act 1872 when consent to an agreement caused by fraud, then the agreement is voidable at the options of other party whose consent was so caused.