Fraud In Business Law

Fraud In Business Law

    Fraud {Sections 17 }


Indian Contract Act 1872

The term fraud includes all intentional or wilful misrepresentation of facts which are material for the formation of a contract. The most important thing in fraud is the intention to fraud the other party which distinguishes it from misrepresentation.

 “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: –

  • 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 the fact 
  •  A promise made without any intention of performing it
  • Any other act fitted to deceive 
  • Any such act or omission as the law specially declares to be fraudulent. Explanation :


(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 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. 

(c) 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. In the case of Deny v Peek in England, it was held that“ Fraud is proved when it is shown that a false representation has been made (1) with knowledge or (2) without belief in its truth or (3) recklessly carelessly whether it be true or false.” 

Example:- A purchases good from B, he has no intention of paying for it. The contract is caused by fraud and is voidable at the option of B. 

Example: A comes to B’s house as a financial expert and asks him to deposit with him `10,000 which will be doubled in next two months. He run away with the amount. This amounts to fraud.

Mere silence is not fraud.

 A party to the contract is under no obligation to disclose the whole truth to the other party. ‘Caveat Emptor’ i.e. let the purchaser beware is the rule applicable to contracts. There is no duty to speak in such cases and silence does not amount to fraud. Similarly there is no duty to disclose facts which are within the knowledge of both the parties.

Example: H sold to W some pigs which were to his knowledge suffering from fever. The pigs were sold ‘with all faults’ and H did not disclose the fact of fever to W. Held there was no fraud. [Word vs. Hobbs]


Mere Silence Would Amount To Fraud under Certain Circumstances

Although a mere silence as to facts which is likely to affect the willingness of a person to enter into a contract is no fraud, where there is a duty to speak or where his silence is equivalent to speech, then such silence amounts to fraud. These are also known as uberrimae fidei contract.

Duty to Speak: 

Following contracts come within this category: 

Fiduciary Relationship: Here, the person in whom confidence is reposed is under a duty to act with utmost good faith and make full disclosure of all material facts concerning the agreement, known to him.


Indian Contract Act 1872

Example: A broker was asked to buy shares for client. He sold his own shares without disclosing this fact. The client was entitled to avoid the contract or affirm it with a right to claim secret profit made by broker on the transaction since the relationship between the broker and the client was relationship of utmost good faith. (Regier V. Campbell Staurt) 

Contracts of Insurance: In contracts of marine, fire and life insurance, there is an implied condition that full disclosure of material facts shall be made, otherwise the insurer is entitled to avoid the contract. 

Contracts of marriage: Every material fact must be disclosed by the parties to a contract of marriage (Hazi Ahmed v. Abdul Gassi).

 Contracts of family settlement: These contracts also require full disclosure of material facts within the knowledge of the

parties. Share Allotment contracts: Persons issuing ‘Prospectus’ at the time of public issue of shares/ debentures by a joint stock company have to disclose all material facts within their knowledge.


Where the silence itself is equivalent to speech

 Example, A says to B “If you do not deny it, I shall assume that the horse is sound.” A says nothing. His silence amounts to speech.

 In case of fraudulent silence, contracts is not voidable if the party whose consent was so obtained had the means of discovering the truth with ordinary diligence (Exception to section 19) 

Example- A sells by auction to B a horse which A knows to be unsound. 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.


Misrepresentation [Section 18]


The term “Misrepresentation’ means a false representation of fact either made innocently or by non-disclosure of a material fact without any intention to deceive the other party.

Misrepresentation’ means and includes – 

✓ A positive assertion i.e. declaration, 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 

✓ 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 anyone claiming under him (such representations are made by agents.

✓ 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.



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Fraud In Business Law
Fraud In Business Law
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