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Fraud, Misrepresentation and Mistake Under Indian Contract Act, 1872

WHAT IS FRAUD?

According to section 17 of the Indian Contract Act, 1872 “FRAUD” means and incorporates any of the accompanying acts submitted by involved with a contract, or by his representative, with purpose to bamboozle another gathering thereto or his representative, or to prompt him to go into the contract:

  • The idea, as a fact, of that which isn’t correct, by one who doesn’t trust it to be valid;
  • The active camouflage of a fact by one having information or conviction of the fact;

A guarantee made with no aim of performing it; some other act fitted to misdirect; any such act or exclusion as the law uniquely pronounces to be fraudulent.

ESSENTIALS OF FRAUD:

  • There ought to be a bogus statement of fact by an individual who himself doesn’t accept the statement to be valid.
  • The statement ought to be made with an unfair aim of beguiling another gathering thereto and instigating him to go into the contract on that premise.

False statement of fact [SECTION17 (1)]

To comprise fraud, it is essential that there ought to be a statement of fact which isn’t accurate. Mere expression of assessment isn’t sufficient to comprise fraud. In Edington vs. Fitzmaurice, an organization was in incredible monetary troubles and assets to pay some squeezing liabilities. The organization raised the sum by the issue of debentures. While raising the advance, the chiefs expressed that the sum was required by the organization for its turn of events, buying resources and finishing structures. It was held that the chiefs had submitted a fraud.

Mere quietness is no fraud:

It has been noted over that to comprise fraud; there ought to be a portrayal as to be sure false facts. Active camouflage has additionally been viewed as identical to a statement on the grounds that all things considered, there is a positive exertion to hide reality and make a false impact on the brain of the other. Mere quiet, be that as it may, as to facts in no fraud. Clarification to “section 17”, 

EXCEPTIONS:

  • When there’s a requirement to talk, keeping silence is fraud.
  • When silence in itself, identical to speech, such silence is a fraud.

ACTIVE CONCEALMENT [section 17(2)]

When there is an active camouflage of a fact by one having information or conviction of the fact, that can likewise be viewed as comparable to a statement of fact, that can likewise be viewed as identical to a statement of fact and sum to fraud. By active covering of specific facts, there is a work to see that the other party can’t have the foggiest idea about reality and he is made to accept as obvious which is in fact not really.

PROMISE MADE with none INTENTION TO PERFORM IT [section 17(3)]

At the point when an individual makes a guarantee, there is considered to be an endeavor by him to perform it. In the event that there is no such aim when the contract is being made, it adds up to fraud. Accordingly, if a man takes an advance with no goal to reimburse, or when he is bankrupt, or buys products on layaway with no aim to pay for them, there is fraud. In the event that, there is no such terrible expectation at the hour of making contract, however the guarantee doesn’t play out the contract, it doesn’t add up to fraud.

ANY ACT OR OMISSION WHICH THE LAW DECLARES AS FRAUDULENT [section 17(4)]

Clause (4) provides that ‘any other act fitted to deceive’ will likewise add up to fraud. This condition is general and is expected to incorporate such instances of fraud which would some way or another not come quite close to the prior three provisos.

ANY ACT OR OMISSION WHICH THE LAW DECLARES AS FRAUDULENT [section 17(5)]

According to this section 17(5), fraud likewise incorporates any such act or omission as the law exceptionally proclaims to be fraudulent. In such cases, the law requires certain obligations to be performed, inability to do which is explicitly pronounced as a fraud. Fraud is basically an issue of fact and the individual who charges that needs to demonstrate something very similar. On the off chance that the offended party looks for the revocation of the declaration on the ground of fraud or deception, he needs to explicitly argue something very similar and notice the conditions which can prompt the finish of the presence of fraud. Merely making a notice of fraud or deception in the pleadings isn’t sufficient.

Contracts on the basis of false statement:

It is vital that the false statement probably been made to initiate the other party to go into the contract. In KAMAL KANT versus PRAKASH DEVI, the plaintiff, Kamal Kant recorded a suit against his mom, Prakash Devi and some others looking for the cancellation of the trust deed on the ground that his mark to it was acquired by fraud by falsely disclosing to him that it was the overall force of lawyer. The deed, for this situation, was bore witness to by the plaintiff’s dad and a supporter. The plaintiff was an informed man and had every one of the means to know the substance the report. Under these conditions, it was held that there was no fraud for this situation.

MISREPRESENTATION

Section 18 of the Indian Contract Act, 1872 characterizes misrepresentation as under: 

  • The positive assertion, in a way not warranted by the data of a person making it, of that which isn’t true, however he believes it to be true. 
  • Any breach of duty which, without any intent to deceive, gains a benefit to the person submitting it, or anybody claiming under him,
  • Causing, anyway innocently, a party to an agreement, to commit an error regarding the substance of what which is the subject of the agreement. 

Positive assertion, for example an explicit statement of fact by a person of that which isn’t true, however he believes it to be true adds up to misrepresentation. There ought to be a false statement made innocently, without any intention to deceive. NOORUDEEN versus UMAIRATHU BEEVI is an illustration where the transaction was saved on the ground of extortion and misrepresentation. The respondent, who was plaintiff’s child, got a record executed from the plaintiff portraying it as hypothecation deed of the plaintiff’s property. In fact, by extortion and misrepresentation, the archive executed was a deal deed of the plaintiff’s property. The plaintiff was a visually impaired man and the deal was for an inadequate consideration. It was held that such a deed which was got executed by extortion and misrepresentation was rightly saved.

CLAUSE 1

The first clause refers to a positive assertion, which apparently means an outright and explicit statement of fact, not merely such language as to lead the hearer to infer it.

NEGLIGENT MISREPRESENTATION: Negligent misrepresentation is one made recklessly or without sensible justification for trusting it to be true. In any case, it cannot be respected except if the representer owed a duty to the representee to watch out. The equivalent above statement was given for the case DERRY vs. PEEK .

INNOCENT MISREPRESENTATION: The term innocent misrepresentation is utilized for the misrepresentation wherein no component of fraud or negligence is found or one for which the representee has great grounds of conviction. In MACKENIZE versus Regal BANK OF CANADA, a wedded lady stood guarantee given by her for the indebtedness of the organization in which her better half was the primary investor. Before she stood guarantee, she was assured by her better half and the bank manager that her offers were bound to the bank and they had gone in any case and the possibly possibility of getting them back was on the off chance that she marked the guarantee. There was a subsequent renewal of the guarantee before the plaintiff was instructed with respect to the true facts. The contract of guarantee was held obligated to be stayed away from as initiated by material misrepresentation regardless of whether innocently made. The mere fact that the party making the portrayal has regarded the contract as restricting and had acted on it didn’t block alleviation nor could it be said that the plaintiff got anything under the contract which she unable to restore.

CLAUSE 2

In ORIENTAL BANK CORPORATION vs. JOHN FLEMING, Sargent J. noticed: The second clause of s. 18 is likely planned to meet that load of cases which are brought in the courts of enquiry, perhaps lamentably thus, cases of ‘developed fraud’, in which there is no intention to deceive, yet where the conditions are, for example, to make the party who gets an advantage from the transaction similarly answerable as a result.

CLAUSE3 

In RE NURSEY SPINNING AND WEAVING ,two directors, a secretary, a treasurer and an agent of the organization signed a bill of exchange in the structure in which the organization would not be liable. The bill was offered to the bank. It was held that the organization would not have been liable as a drawer. The choice proceeded on the ground that the directors, while acting inside the scope of the power, had sold the bill as one on which the organization was liable, however whereupon, having respect to the structure in which it was drawn, the organization couldn’t be rendered liable, and the directors were, subsequently, guilty of misrepresentation inside the significance of the current sub section.

MISTAKE:

According to section 20, Mistake may work in two ways: A mistake in the minds of parties is to such an extent that there is no genuine agreement by any means. There might be no consensus and idem for example the gathering conflicted, for example there might be absent of consent. The offer and acceptance don’t coincide and hence no genuine agreement is comprised between the parties. 2. There might be a genuine agreement, yet there might be a mistake with respect to an obvious reality identifying with that agreement.

Mistake, when there’s no consensus ad idem or there’s an absence of consent: “Two or more persons don’t comply with precisely the same thing during a similar sense, there is deemed to be no consent on their part. At the end of the day, there might be a shortfall of the gathering of minds of the parties, or there might be no consensus promotion idem. In such cases, there emerges no contract which can be authorized.” In RAFFLES versus WICHELHAUS, the buyer and the seller went into an agreement under which the seller was to supply a load of cotton to show up “ex Peerless from Bombay”. There were two ships of a similar name for example Peerless and both were to cruise from Bombay, one in October and other in December. The buyer had as a main priority peerless sailing in October while the seller thought about the ship sailing in December. The seller dispatched the cotton by December ship yet the buyer refused to acknowledge something very similar. For this situation, the offer and the acceptance didn’t coincide and there was no contract. Along these lines, it was held that the buyer was qualified for refuse to take delivery.

Mistake as to a matter of fact essential to the agreement: According to section 20, where both the parties to an agreement are under the mistake regarding an obvious fact essential to the agreement, the agreement is void.

MISTAKE ESSENTIAL TO AGREEMENT:

MISTAKE AS TO THE EXISTENCE OF THE SUBJECT MATTER:

If both the parties to contract believe in the presence of the topic, which in fact doesn’t exist, the agreement would be void. The explanation is that if the topic of the contract has effectively perished, there is nothing with respect to which the contract is being made. In GALLOWAY versus GALLOWAY, a man and a lady executed a partition deed, the two of them working under a typical mistaken impression that they were hitched to one another. Since the very fact of marriage was non-existent, the deed was held void.

MISTAKE REGARDING QUALITY OF THE SUBJECT MATTER ONLY:

If the parties to contract are not mistaken with respect to the subject matter, however just in regards to its quality, for example at the point when the subject matter has been unmistakably recognized in spite of the fact that its quality has not been, the agreement would be valid. In SMITH versus HUGHES, there was a sale of a parcel of oats by test by A to B. B refused to acknowledge the oats on the ground that he felt that the oats were old when in fact they were new. A guaranteed for damages from B. It was held that there was no mistake with regards to the personality of subject matter, however just concerning the time of oats. The contract, for this situation, was not for the sale of old oats, however of a particular parcel, by an example. The contract was, consequently, valid and B was responsible for not accepting the products.

MISTAKE AS TO PROMISE

In the event that there is a mistake as a result of which the promise doesn’t mirror the genuine intention which was there in the proposed agreement, such an agreement would be void. In HARTOG versus COLINS and SHIELDS, there was a contract for the sale of 30,000 bits of Argentine bunny skins. Negotiations as to cost were on ‘per piece’ premise and that was as per the typical exchange practice. The sellers by mistake in the offer specified to supply at a specific rate “per pound” rather than “per piece”. A pound on a normal contained three bits of such skins. The buyer sued the sellers for the non delivery of products. It was held that there had emerged no contract for this situation, on the grounds that the buyer might have noticed the mistake by the sellers contained in their offer, and on account of their mistake, the seller’s intention was not appropriately reflected in the offer.

References

  • (1885) 29 Ch. 459, Indian contract act, RK Bangia
  • A.I.R. 1976 Raj. 79.
  • A.I.R. 1998 Ker. 171.
  • (1889) 14 A.C. 337.
  • (1934) A.C. 468 PER Lord Atkin at 475
  • (1879) ILR 3 Bom 242 at 267
  • (1881) 5 Bom 92
  • (1864) 2 H & C. 906
  • (1914) 30 T.L.R. 531; followed in Law vs. Harragain, (1917) 33 T.L.R. 381.
  • (1871) L.R. 6 Q.B. 597.
  • (1939) 3 All E.R. 556.

This article has been written by Sneha Dutta, from KIIT School of Law.

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