Fraud and misrepresentation
Fraud and misrepresentation
Fraud and misrepresentation
1.1 According to section 17 of Indian Contract 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 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.
MISREPRESENTATION
1.2 According to section 18 of Indian contract act Misrepresentation means and includes
1.The positive assertion in a manner not warranted by the information of the people making it of that which is not true though he believes it to be true. .
2.Any breach of duty which without an intent to deceive gains an advantage to the person committing it or anyone claiming under him by misleading another to his prejudice or to the prejudice of anyone claiming under him.
3. 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.
2. FRAUD AND MISREPRESENTATION
The principal difference between fraud and misrepresentation is that in one case the person making the suggestion does not believe it to be true and in the other he believes it to be true, though in both the cases it is a misstatement of fact which misleads.
The language of the contract act throws no light on the relating of fraud to misrepresentation. Fraud, as a cause of recession of contracts, is generally reducible to fraudulent misrepresentation. Accordingly, misrepresentations either fraudulent or not fraudulent . If fraudulent, it is a always a cause for rescinding a contract induced by it if not, it is cause of recession only under certain conditions which the definitions of s 18 are intended to express. There are however forms of fraud which do not at first sight appear to include any misrepresentation of fact and the representation, false assertion, ambiguous statements, active concealment, duty to speak and promise without an intent to perform it are intended to cover the field.
Under common law fraud will not only render the contract voidable at the option of the party whose consent is so obtainer, but will also give rise to an action for damages in respect of deceit.
If a decree is found to have been obtained by fraud, an application moved even belatedly would be maintainable. The court has inherent jurisdiction to grant relief on such an application and even principles of res judicata would not apply. Fraud is conduct either by letters or by words[1] , which induces the other person or authority to take a definite determinative stand as a response to the conduct of the former .It is also well settled that misrepresentation itself amounts to fraud. Indeed, innocent misrepresentation may also give reason to claim relief against fraud. A fraudulent misrepresentation is called deceit and consists in leading a man into damage by willfully or recklessly causing him to believe and act on falsehood. It is a fraud in law if a party makes representation which he knows to be false, and injury ensues therefore although the motive from which the representation proceeded may not have been bad. Fraud and justice never dwell together[2]
3. EFFECT OF FRAUD
In state of Andhra Pradesh vs T. Suryachandra Rao[3]it has been held that fraud vitiates every solemn act[4].
3.1 If A makes a statement to B which A knows to be untrue and does so with a view to induce B to enter into the transaction there is sufficient basis for an action of deceit provided B relied upon the statement. If however it can be shown that A did not appreciate that it was not the truth this will be consistent with honesty and will ground to charge of fraud. The foundation of fraun under s. 17 is that a person making any representation which he intends another to act upon must be taken to warrant his belief in its truth He must be presumed to be aware of the fact that the person to whom it is made will at least understand that he, the representer, believes it to be true.
3.2 A contract, consent to which is obtained by fraud is voidable under s 19. The party deceived has the option to affirm the contract and insist that he would have been if the representation were true, or ha may recind the contract to the extent it is not performed. Upon rescission he is liable to restore the benefit received by him under s 64 and may recover damages. The damages recoverable is essentially that applicable to the tort of deceit[5] i.e all the actual loss directly flowing from the transaction induced by fraud, including the heads of consequential loss, and not merely the loss which was reasonably foreseeable. Where a document which was intended to be in favour of a particular person but was a result of fraud of defendant conveyed to someone else, the transaction would be also voidable under s 19[6].
3.3 when once it is established that there has been any fraudulent misrepresentation or willful concealment by which a person has been induced to enter into a contract it is no answer to hisclaim to be revealed from it to tell him that he might have known the truth by proper enquiry, or that he has made a cursory and incomplete inquiry into the facts. If there has been material misrepresentation calculated to induce him to enter into the contract in order to take away his title to be relieved from its own ground that the representation was untrue it must be shown either that he had knowledge of the facts contrary to the representation or that he did not rely on the representation.
3.4 It is not essential to constitute fraudthatthere should be any misleading by express words it is sufficient if it appears that the plaintiff knowingly assisted in inducing the defendant to enter into the contract by leading him to believe that which the plaintiff's knew to be false the plaintiff s knowingly that if he had not been such mislead he would have entered into the contract. Secrecy and haste do not, by themselves constitute fraud [7]
3.5 It is the duty of whom receives information or warning that his premises will be set on fire in consequence of which he insures the premises to disclose to the insurer the information so received. If he fails to do so the insurer is discharged from liability. Every circumstances which would influence to be likely to influence the judgment of a prudent insurer is fixing the premium and in determining whether he will take the risk or should be disclosed[8] .
4. INDUCEMENT OF MISREPRESENTATION
v The representation must not be known as false by the other party .
v The plaintiff must have believed or relied upon the other party.
v The plaintiff must have suffered damages from the misrepresentation.
v Misrepresentation can result from conduct and not from just oral service.
v If intended to be binding on them more likely to be a breach of warranty or conditions rather than just a misrepresentation.
5. EFFECTS OF MISREPRESENTATION
The contract is voidable at the option of the party who was induced by misrepresentation to enter in to a contract. He has two remedies[9] open to him either to elect to rescind the contract or to seek enforcement of representation and insist upon being placed in the same position as if the contract were performed the difference between a claim for damage and suit for recession is this. In the former case the contract is left intact and the suit is to enforce it and substitutes money damages for performance. In the latter case, the object is to avoid performance of the contract. Hence any order made on recession should have as its object the restoration of the parties to their original position. The idea is restitutio in integrum and the parties to be restored to status quo ante.
Misrepresentation as to a part would make the whole transaction voidable.
The principle difference between fraud and misrepresentation is that in the first case the person making the suggestion does not believe it to be true and in the other he believes it to be true, though in both the cases, it is a misstatement of fact which misleads the promisee.
6. TO PROVE A CASE TO BE FRAUD IN INDIA
To prove a case to be false in India it must be proved that representation made were false to the knowledge of the party making them[10].
The statement must be false in substance and in fact[11]
Fraud is proved when it is shown that a false representation has been made;
v 6.1 Knowingly;
v 6.2 Without belief in its truth ;
v 6.3 Recklessly;
Careless whether it to be true the third is but an instance of the second for one who makes a statement under such circumstances can have no real belief in truth of what he states.
It was further held that there was no fraud in making of false statement
Through want of care, or a false representation honestly believed , though on insufficient grounds, but, when a false statement was made the question whether there were reasonable grounds for believing it and what were the ,means of knowledge in the possession of a person making it were important factors however misrepresentation as to title made by vendors made recklessly cannot escape the charge of fraudulent misrepresentation[12]
A positive knowledge of falsehood is not the criterion. In order to constitute fraud, it is neccessary that the statement must have been made by the person concerned with knowledge of its falsehood of a material assertion, which however, it turnout to be untrue is deemed equivalent to the knowledgement of its untruth as also where the representor suspected that his statement might be accurate or that he neglected to inquire into its accuracy. Giving a false impression and including a person to act upon it is fraud even if each fact taken by itself would be literally true[13] so is it fraud to state a thing partially which when understood is false[14].If by a number of statements a person intentionally gives a false
impression and induces another person to act upon it, it is not the less false although if one takes each statement by itself there may be difficulty inshowing that any separate statement is untrue[15]
7. CONTRACTS UBERRIMAE FIDEI'
A contract Uberrimae Fidei is a contract of utmost good faith'. Similarly to fiduciary relationships, the parties are required to make known all material facts influencing the contract. Contracts uberrimae fidei usually arise when one party has knowledge which the other does not have access to. Contracts which are commonly considered to be of such a nature include contracts of insurance and family agreements. When applying for insurance, the person or entity must disclose all material facts so that the insurer can
properly asses the risk involved with the offering of insurance. Since the insurer cannot have access to all information relating to the insured and their situation which could affect the risk involved, it is necessary for this disclosure so that both parties are entering into the contract on equal grounds. Lord Blackburn addressed the issue in Brownlie v Campbell (1880) 5 App Cas 925 when he noted "...the concealment of a material circumstance known to you...avoids the policy.". Another contract considered uberrimae fidei is that of family agreements. In Gordon v Gordon (1821) 3 Swan 400, two brothers had reached an agreement regarding the family estate. The elder brother was under the impression that he was born out of wedlock and thus not their fathers true heir. The agreement was reached on this basis. The elder brother subsequently discovered that this was not the case and that the younger brother had knowledge of this during the negotiation of the settlement. The elder brother sued to set aside the agreement and was successful on the grounds that such a contract was one of uberrimae fidei and the required disclosure had not been executed.
For instance a proposal for insurance for a woman could not be accepted if she had last delivered child within six months prior to the date of proposal. The primary information of the birth was within the exclusive knowledge of the parents and when that was not correctly given there was a deliberate omission and conscious avoidance of duty on the part of the insured.[16]
8. DAMAGES FOR FRAUD
Where a contract is induced by fraud, the representee is entitled to claim rescission or damages or both. He would have a remedy by way of such suit even if restutio in integrum is not possible[17].
The damages for fraudulent misrepresentation, under the general rule,are arrived at by considering the difference
In the position the plaintiff would have been in had representation been true and the position he is actually in consequence of its being untrue.
In Dambarudhar Behera vs State of Orissa[18] the plaintiff who had rescinded the contract for misrepresentation of facts known to the misrepresentor, claimed damages as the difference between the expenditure incurred towards the contract less earnings derived until the plaintiff knew of the misrepresentation and these were upheld.
9. CONTRACTS OF INSURANCE
The duty of utmost good faith is of universal application to all policies of insurance although there are differences in the detail affecting the way in which the duty is applied. In its practical application it means that either party has the right to avoid the contract of either:
9.1 There has been a failure by the other party to disclose a material fact
9.2 That there has been on the part of the other party a misrepresentation of a material fact.
It is the duty of a person wishing to take an insurance policy of any kind , marine, fire, life, guarantee to make full discloser to the insurer without being asked of all material circumstances[19] In a contract of insurance utmost good faith is essential i.e. the insured is expected to answer various question and give true and faithful information. If the insured has the knowledge of fact which others cannot ordinarily have then he should not indulge himself in suppressio falsi by making a suggestion which is false [20].The insurer can avoid the policy of three conditions are satisfied[21]:
v There is misstatement on material matter or suppression of facts which it was material to disclose.
v The suppression was fraudulently made by the policy holder
v The policy holder must have known at the time of making the statement that it was false or that is suppressed facts which it was material to disclose.
In marine insurance the insured is under a duty to disclose very material circumstances known to him [22]. It is not the insurer's practice to ask any questions they rely for their protection on common law duty of discloser. In marine insurance an insurer can avoid the contract even if a material representation made by the insured or the agent during negotiations before the contract is untrue.
10. INDUCEMENT IN MISREPRESENTATION
It is further necessary that misrepresentation must be the cause of the consent, in the sense that but for the misrepresentation must be the cause of the consent, in the sense that but for the misrepresentation the consent would not have been given.[23] The explaination to s 19 -
A fraud or misrepresentation which did not cause the consent to a contract of the party of whom such fraud was practiced or to whom such misrepresentation was made, does not render a contract voidable.
If the plaintiff would have consented in any case, he can hardly complain. Again the representation must be made with the intention that it shall be acted upon the other party'.[24] The plaintiff must have been affected by the false representation. There would be no misrepresentation even if the advertisement was false if the buyer has inspected the goods before buying them unless the examination. If the person to whom the statement was not addressed voluntarily chooses to act upon it, he is not entitled to rescission.
11. MISREPRESENTATION- QUESTION OF LAW OR OF FACT
Whether the representation made in a particular case actually induced the other party to enter in the contract or not is a question of fact and not of law. Incorrect statement of the matter of law is not such misrepresentation as will entitle the other party to whom it is made to obtain relief [25].But a misrepresentation on point of law, if willfully made will disentitle a party to any benefit he has got by such misrepresentation. A misrepresentation on a matter of private right, however is a representation of fact. A collateral promise to do some act though it may effectively induce the promise to enter in a contract, is not, properly speaking a representation at all[26]. A representation made by one party for the purpose of influencing the conduct of the other party and acted on by him, will in general will be sufficient to entitle him to the assistance of the court to have the untrue representation made good.
12. ESTOPPEL
When a person makes a statement with intention that it should be acted upon, and it is acted upon, the person is stopped from contesting its truth even though it is fraudulently made.
13. DIFFERENCE BETWEEN FRAUD AND MISREPRESENTATION
v Fraud implies an intent to deceive which lacks in misrepresentation.
v In case of misrepresentation and fraudulent silence the defendant can take a good plea that the plaintiff had the means of discovering the truth with ordinary diligence. The argument is not available if there is fraud
v Misrepresentation may lead to avoidable of contract. In fraud the plaintiff can claim damages as well
v If there is fraud it may lead to prosecution for an offence under the Indian Penal Code.
14. FRAUD IN MARRAIGE
Where consent of one party to a marriage is obtained by fraud as to the nature of the ceremony or as to any material fact or circumstances concerning the other the marriage is voidable at the option of the first party and can be annulled by a decree of nullity.[27]The concept of fraud for this purpose is not in the same sence as defined in this section[28].The concept of fraud in the contract act is wider than fraud in relation to matrimonial causes. However if not disclosure relates to a fact amounting to a fraud [29]or where the annulment of an earlier marriage on the ground of unsoundness of mind was concealed it was also a fraud where vital information that the mad had undergone vasectomy was not disclosed[30], or that a party to the marriage was suffering from some abhorrent disease such as leprosy or venereal disease or that the husband was employed when in fact he was a trainee,[31]. Age, educational, qualification, income,
Caste, marital status, family status, financial status religion or nationality have been stated to be material facts and circumstances for the purpose of the marriage as also size of proposed matrimonial home but concealment of fact by the wife that she was suffering from a venereal disease did not amount to fraud.
Unlike Hindu law in Muslim law a marriage is a contract. It was contended by the busband that at the time of marriage he was not aware of the fact that the wife was pregnant and this fact was concealed and thus the marriage was illegal and void. It was held that since husband continued to live with the wife for about four and half years after the marriage and divorced her thereafter as such he could refuse to pay maintenance to her.
If the party alleging fraud had the facts before it or had the means to know them, it could not be said to have been defrauded, even if a false statement has been made[32]. The party deceived has the option to affirm the contract and insist that he be put in the position In which he would have been if the representations were true, or he may rescind the contract to the extent it is not performed. Upon rescission, he is liable to restore the benefit received by him under sec 64 and may recover damages. As also in misrepresentation the can grant rescission under sec 30 of The Specific Relief Act 1963 and would be entitled to the extent provided in sec 65 in Indian Contract Act,1872.
[1] Ibid p.3
[2] Ram Chandra Singh vs. Savitri Devi 2003 8 SCC 319
[3] (2005) 6 scc 149
[4] Ibid p.2 (2)
[5] Anson;s law of contract 27th edition p 241
[6] Havilder Singh vs Aditya Singh AIR 1978 PAT 166
[7] Ram vs. Jagarnath AIR 1932 ALL5
[8] Bhagwani Bai vs LIC of India AIR 1984 MP 126
[10] Gauri Shankar vs Manki Kunwar AIR 1924 All17
[11] RC Thakkar vs Gujrat Hgs board AIR 1973 Guj 34
[12] Sayu Mohammed Abdulla vs Neelakatan Krishnan AIR 1958 Ker 322
[13] Jewson& sons ltd vs Arcos ltd 1933 39 com pas 59
[14] R vs Kylsant 1931 ALL ER Rep 179
[15] S Chatterjee vs Dr K Bhabe AIR 1960 MP 323
[16] V Srinivasa Pillai vs Agent of Life Insurance Corporation of India AIR 1977 Mad 381
[17] Indranath Banerjee vs Rooke 1910 ILR 37 Cal 81
[18] AIR 1980 ORI 188
[19] BAS Chopra vs New Zealand Buurance Co ltd AIR 1967 Cal 35
[20] Ibid p.6 footnote 16
[21] Mithoolal Nayak vs LIC AIR 1962 SC 814
[22] See Tne marine insurance act 1963 s 20(1)
[23] Hims enterprise vs Ishak Bin Subari 1992 1 CLJ 132 HC
[24] Anson Principle of English law of contract and of agency relation to contract 22nd edn by A.G Guest 1964 p.211
[25] Law of contract 11th edition p.333
[26] Harilal vs Jaganpati 111 IC 767 (804)
[27] The Hindu marriage act 1955 s 12(1)(c).
[28] Nanda kishor vs. Munnibai AIR 1979 MP 45
[29] Rajendra singh vs. Pomilla AIR 1987 Del 94
[30] PJ Moore vs Valsa air 1997 Del 94
[31] Bindu Sharma vs Ran prakash shafllla AIR 1997 Del 94
[32] Kamal Kant Paliwal v Prakash Devi Paliwal AIR 1976 RAJ 79
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