The contracts’ world is rather delicate and when fraud is involved, it is always essential to know the law. Section 17 of the Indian contract act, 1872 is a very effective weapon against the fraudulent practices. In this detailed guide, we will analyse the Explanation of section 17 and focus on the types of fraud.
This blog comprises the following sections: the parties involved, and how to prove fraud in a court of law. We will also identify effects of the crime, and reparations to the victims or punishment to the criminals. Therefore, regardless of if you are a commercial person or a customer or just in general someone learning about contract law as we go, let’s dive into the intricacies of fraud under section 17 of the Indian contract act 1872.
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Section 17 of Indian Contract Act, 1872
According to Section 17 of the Indian Contract Act, 1872 fraud means act or omission for the purpose of deception or to cause a party to enter into a contract. This definition covers a broad spectrum of aspects of the material that can be misrepresented in a way as to alter the formation of a contract.
For Example: A sells a house to B and noting that it has defaults and a legal lawsuit on the foundation, tells B that the house has no issues. B, putting his faith in A, buys the house but she realises the problems which leads to loss of money. This is fraudulent under Section 17, therefore the contract is voidable.
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Essential elements to constitute Fraud under Section 17 of Indian Contract Act, 1872
There are at least 5 essential elements which indicated the constitution of fraud under Section 17 of Indian Contract Act, 1872-
1.Fraud or Misrepresentation
Fraud involves a misrepresentation of a material fact where one person who makes the statement does not intend to tell the truth. It has to be a fact that is used to change any of the contractual terms, or which influences the other party’s decision of making the contract.
2. Intent to Deceive
It means that the information provided under this act must be misleading through the act of deceit or dishonesty. Fraud is therefore distinct from innocent misrepresentation in which the false statement is made and the maker of the statement does not know that it is false.
3. Promise as an approach to encourage one to enter into a contract
The misleading action or falsehood has to be that which would have influenced the other party to the contract to engage in the contract. The party receiving a false representation must act relying on that representation.
4. Real or Likelihood of Harm to the Mislead Party
Fraud should cause real damage, or there is the possibility of the damage or loss to the victim. Such a loss had to be of a pecuniary or of any other nature that is in some way connected to the content of the contract.
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Types of Fraud under Section 17 of Indian Contract Act, 1872
There are 5 kinds of fraud as defined in Section 17 of Indian Contract Act, 1872-
1. Asserting facts without belief in truth
Section 17(1) of Indian Contract Act, 1872 states that when someone makes a false statement about a material fact or lends secrecy to it, it becomes fraud to the extent that it affects in some way the contract.
For example, A sells land to B, saying that it isn't mortgaged, when in fact it is. Based on this misinformation, B buys, and finds out later that it is a mortgage and loses.
In the case of A.L. Mustaneer Establishment v. Varuna Overseas Pvt. Ltd. (1998) a person cannot be seen as fraudulent if they sincerely, honestly believe their false statement to be true.
2. Active Concealment of a fact
Section 17(2) of Indian Contract Act, 1872 says that active concealment is an act where a person deliberately hides or conceals the material facts with the intention to deceive or mislead a person to get him to contract. Following are the acts covered by Indian Contract Act, 1872 which constitute active concealment:
When There’s a Duty to Speak (contracts uberrima fides): When a person is expected to speak the truth, then being silent is a form of fraud. This duty comes up where one person can reasonably rely on the other’s action or inaction.
When Silence is Deceptive: Sometimes, remaining silent is itself equal to speech and if a person keeps silent knowing that his silence will result in deception, it becomes fraud.
When Circumstances Change: For a statement to be considered misleading the maker of the statement was correct at the time the statement was made but subsequently becomes wrong due to change in circumstances, the maker of the statement is entitled to inform the other party.
Half-truths: A person may not be under legal duty to provide some details, but he can be a fraudster if he decides to tell all the truth partially. As soon as people begin to disclose some information they are supposed to disclose the whole truth. Leaving out half of the process, or even key details, can mean fraud.
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3. Promise made without intention of performance
This type of fraud arises when the fraudster promises the victim something, with no real intention of fulfilling this promise. Its purpose is frequently to prevent the other party from dealing with someone else, even though the promisor has no intention of doing so. It is equally the third type of fraud under Section 17(3) of the Indian Contract Act, 1872.
4. Any other act fitted to deceive
The fourth kind of fraud listed in Section 17(4) of Indian Contract Act is any act that is calculated to deceive another person.This can happen in a situation, where one individual employs outsmarting, lying or manipulative unhealthy ways to overtake or deceive another individual.
It occurs when an act or a contract may not be the act of direct fraud but is capable of deceiving others or breaching trust (whether or not public). Such actions are unlawful even if no wrongful purpose is entertained.
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5. Any act of omission specifically declared as fraudulent by law
The last kind of fraud mentioned in Section 17(5) of the Indian Contract Act, 1872 is the act or an omission expressly known and declared to be fraudulent by law. In simple words, this provision ensures that all fraud recognised under other legal provisions shall be captured by this section
Exceptions or Defences: Section 17 of Indian Contract Act
There are basically four kinds of defences according to Section 17 of Indian Contract Act, 1872, these are:
A) Statutory limitations
Statutory limitation is of great concern when fraud is claimed under Section 17 of the Indian Contract Act, 1872. Such restrictions define the time during which legal processes must be launched. Indian law in relation to limitation is mostly governed by the Limitation Act, 1963.
B) Contractual limitations
Parties may include specific clauses in their contracts to limit fraud claims:
Temporary reporting obligations
Alteration means of consuming disputes (e.g., arbitration)
Caps on damages or liability
C) Doctrine of caveat emptor
The principle of "let the buyer beware" can limit fraud claims in certain situations:
Applies mostly in the contracts for the sale of goods and property deals.
That is why it is essential for the Buyer to require inspection and confirmation before making the purchase.
May not apply if the defects are well hidden by the seller.
D) When mere silence does not amount to fraud
Section 17 of the Indian Contract Act states that no one will be held guilty of fraud merely because the person has remained silent when, in fact, there is no legal or contractual requirement to speak. This principle supports the proposition minimum the best of parties, they do not owe obligations of disclosure and that it would be unfair for anyone to be convicted of having a duty to speak in absence of any legal, contractual or other basis for imposing such duty.
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Effect of Fraud
Following are the effect explained if there is any fraud occurred in a contract as per Section 17 of Indian Contract Act, 1872:
A. Voidability of contracts
If fraud is proved under section 17 Indian Contract Act 1872 the aggrieved party gets authority to avoid the contract. This means that they can decide to go on with the agreement or abandon the agreement pronouncing it as having no effect at all. The voidability option puts the power in the hands of the victim to act in their own best interests and, indeed, to get their own way.
B. Damages and compensation
Where there is fraud, the injured party has the right to demand compensation and reimbursement as long as he has suffered any loss because of the fraud. This includes:
Direct financial losses
Consequential damages
Legal fees and court costs
The objective is to bring the victim to the status he or she would have been in had the fraud not been perpetrated.
C. Rescission of contract
Rescission means that the defrauded party can or will want to cancel the contract and restore the position that each party was in prior to the contract’s formation. This remedy:
Cancels all the contractual relationships
Calls for a repayment of benefits which has been received
May require restoring to status quo as a form of remedial action
Also, Get to Know about What are the 10 Essential Elements of a Valid Contract in Indian Contract Act, 1872.
Difference between Fraud and Misrepresentation in Indian Contract Act, 1872
Fraud and misrepresentation are two wholly different concepts under the Indian Contract Act, 1872, and relate to inducing the third party to enter into the contract, taking on false pretences. Both can render a contract voidable, but they have a different intent, nature and consequences.
Definition and Intent:
Fraud is deception practised for any purpose, including defrauding another of something of value, or gaining some unfair advantage as per Section 17 of Indian Contract Act, 1872. Such acts include false statements, concealment of the facts or a promise arbitrarily given.
On the other hand, misrepresentation under Section 18 of Indian Contract Act, 1872 innocent or negligent misstatements of fact made innocently or negligently without either intending to deceive or being able to foresee that the words would be taken as a promise are actionable if the other party contracts as a result.
Nature:
Wilful and deliberate and with malicious intent, fraud is defrauding. Unintentional misrepresentation occurs when a party misrepresents, without knowingly, what was not known, or what had been negligently overlooked.
Legal Consequences:
The aggrieved party can rescind the contract and have the damages in cases of fraud.
In case misrepresentation, the aggrieved party may break the contract but can only sue for damages, if negligence can be shown.
Burden of Proof:
In fraud, the aggrieved party must prove the fraudulent intent whereas in misrepresentation, intent is not relevant rather it focuses if the representation was false and induced the contract.
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Conclusion
'Fraud' means the intentional deception by one party to induce another party to enter the contract resulting in violation of free consent. It covers some acts, such as knowingly making false statements, or actively concealing material facts, or making promises without intention of performing them or doing anything intended to cheat. It also encompasses the omissions that break the duty of disclosure of an information to lead one party in misleading the other party.
A fraud makes a contract voidable for the aggrieved party at its option; it may rescind the agreement, and, upon some, may recover damages. Yet, anyway, trivial misstatements that do not significantly influence the other party’s choice aren’t characterized as a tilt. The purpose of this provision is to penalise deception arising from deliberate dishonesty with a right of affected parties.
Section 17 of Indian Contract Act, 1872: FAQs
Q1. What is Section 17 of the Indian Contract Act about?
Section 17 of the contract law defines "fraud" as comprising the actions which mislead or deceive the party to enter into a contract.
Q2. What are the elements of Section 17 of fraud?
Fraud is the knowing or recklessly making a false statement, concealing facts or inducement to act deceitfully.
Q3. Is Section 17 allowing a contract to be voidable?
The contract can be voided at the aggrieved party’s discretion if fraud is proven.
Q4. To what remedies are available for Section 17 fraud?
It allows the deceived party to repeal the contract, or to claim damages, or both.
Q5. Section 17: Is silence fraud?
If silence amounts to a deliberate concealment of material facts it can be fraudulent.
