FRAUD

“Mere silence does not amount to fraud” under the Indian Contract Act 1872. Examine the statement and also state the exceptions to the above rule.

As per Section 13 of the Indian Contract Act, Consent means when two or more persons agree upon the same thing in the same sense.
It is based on the Latin maxim “Consensus Ad Idem” which means Meeting of minds.
For example:- ‘A’ agrees to sell his house to ‘B’. ‘A’ owns three houses and wants to sell his house in Mumbai. ‘B’ thinks he is buying his Delhi house. Here ‘A’ and ‘B’ have not agreed upon the same thing in the same sense. Therefore, there is no consent and no contract afterwards.

The term “Free Consent” is defined under Section 14 of the Act which states that the consent is said to be free when it is not caused by

1. Coercion under Section 15
2. Undue Influence under Section 16
3. Fraud under Section 17
4. Misrepresentation under Section 18
5. Mistake under Section 20,21,22

When the consent is affected by fraud then the consent is not free consent and the contract is voidable at the option of the aggrieved party in accordance with Section 19 of the Indian Contract Act.

In the case of Rattan Lal Ahluwalia v Jai Janinder Parshad, it was held that under common law, fraud will not only render the contract voidable at the option of the party whose consent is so obtained but will also give rise to an action for damages in respect of deceit.

According to Section 17 of the Act, “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.

The Essential Elements of Fraud are as follows-

1. There must be a suggestion made regarding a fact.
2. The fact suggested must be untrue.
3. The suggestion must come from someone who does not believe it to be true.
4. The suggestion must be made to deceive or induce the other party to enter the contract.

According to the explanation given under Section 17, generally, a failure to disclose information or maintain silence is not deemed Fraud under the Indian Contract Act. Mere silence alone does not constitute fraudulent behaviour unless the case circumstances require the person to speak and disclose relevant facts or if the person’s silence can be considered equivalent to making a statement.

For example- 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.
But in some circumstances, the silence may amount to fraud such as –

1. Duty to Speak– In some cases, silence can be treated as equivalent to speech if there is a duty to speak, and the party remains silent with the intent to deceive.
   For example- the contract of insurance where there is utmost good faith. (Uberrima fides)
2. Where Silence Is Deceptive (Duty to disclose)- If one party has a duty to disclose certain information, failure to do so can be considered fraudulent. This duty arises in the following situations:
   • Where there is a fiduciary relationship between the parties, such as a trustee and beneficiary.
   • Where a party has a special knowledge or skill and knows that the other party is relying on their expertise.
   • When silence would amount to active concealment of a material fact.
3. Change of Circumstances-Sometimes a representation is true when made, but, it may, on account of a change of circumstances, become false when it is actually acted upon by the other party. In such circumstances, it is the duty of the person who made the representation to communicate the change of circumstances.
4. Half-Truths– If one party provides partial information or half-truths with the intent to deceive, this can be considered fraudulent. Even though they technically did not lie, the omission of critical information can mislead the other party.
5. Marital Facts– Non-disclosure of material facts relating to parties to the marriage has been held to constitute fraud.

In the case of P.C Chacko and Anr vs Chairman LIC of India (2007), the insured had undergone a thyroid operation. He had a major operation four years before the date he took the insurance policy. He did not disclose this fact while obtaining the insurance policy. He took the policy on 6th July 1987, and within six months, on 21st February 1987, he died. The court held that the insured did not disclose all material facts of the contract, so it amounts to fraud.

In the case of P.L. Raju vs. Dr. Nandan Singh (2005), a person, after being inquired about, sold his land to the state which was already acquired under the Land Acquisition Act, which he did not disclose earlier. Since the seller of the property kept the buyer unaware of the pending litigation of the property, he was entitled to refund the principal amount with 6% interest on it to the buyer. The act of the seller’s surrender of the land was held nullified.