Fraud under Section 17 of the Indian Contract Act, 1872: The Five Kinds of Fraud, When Silence Amounts to Fraud, the Duty to Speak, Contracts Uberrimae Fidei, and Fraud Distinguished from Misrepresentation

Fraud is the deliberate member of the family. Coercion applies pressure, undue influence exploits a relationship, misrepresentation misleads innocently; fraud misleads on purpose. Section 17 lists five kinds of conduct that constitute it, and the unifying element is stated in the opening words: the act must be done with intent to deceive or to induce the other party to enter into the contract. The most litigated part of the section is its Explanation, which tells us when saying nothing can amount to saying something false.

1. The Definition

1.1 The two threshold requirements

Before any of the five clauses is reached, two conditions in the opening words must be satisfied. The act must have been committed by a party to the contract, or with his connivance, or by his agent; a deception practised by a stranger for whom neither party is responsible is not fraud within the section, though it may amount to misrepresentation or found a claim in tort. And it must have been done with intent to deceive or to induce the contract, which is the element that separates fraud from misrepresentation.

Silence is not fraud, save where a duty to speak exists or silence itself speaks

2. The Five Kinds

2.1 Suggestion of a false fact

Clause (1) requires an assertion of fact, its falsity, and the absence of belief in its truth. Three limits follow. The statement must be of fact and not of opinion, intention or law, though a statement of opinion by one who knows the facts may imply an assertion that he knows facts justifying it. It must be false, and a statement literally true but misleading by what it omits may still fall within clause (2) or (4). And the maker must not believe it to be true, which is the crux of the matter.

2.2 Active concealment

Clause (2) requires an act of concealment by a person having knowledge or belief of the fact, and is therefore different from silence. Painting over a defect, arranging goods so that damage is hidden, or removing a document from a file that the other party is invited to inspect are acts of active concealment. The clause converts what would otherwise be mere non-disclosure into positive conduct, and no duty to speak need be established.

2.3 A promise made without any intention of performing it

Clause (3) is the one instance in which a statement of intention is treated as a statement of fact, on the footing that the state of a person's mind is as much a fact as the state of his digestion. A person who contracts to buy goods having already decided not to pay commits fraud at the moment of contracting. The difficulty is evidential: a subsequent failure to perform does not prove an original absence of intention, and the absence must be established from the circumstances existing at the time the promise was made.

2.4 Any other act fitted to deceive, and acts declared fraudulent by law

Clause (4) is a residual provision covering conduct that deceives without falling within the earlier clauses. Clause (5) brings in acts and omissions that other statutes declare fraudulent, such as transfers made with intent to defeat creditors under Section 53 of the Transfer of Property Act, 1882, and fraudulent preferences and fraudulent trading under insolvency and company legislation.

3. Silence as Fraud

The Explanation states the general rule and its two exceptions. The general rule is that mere silence is not fraud, even as to facts likely to affect the other party's willingness to contract. There is no general duty of disclosure in Indian contract law, and a party is ordinarily entitled to keep his own knowledge to himself and to let the other make his own inquiries.

3.1 The first exception: a duty to speak

A duty to speak arises from the circumstances, and the recognised situations are these.

1. Fiduciary or confidential relationships. Where one party reposes trust in the other, as between principal and agent, trustee and beneficiary, guardian and ward, or partners, full disclosure is required.
2. Contracts uberrimae fidei, that is of utmost good faith, where the material facts are within the knowledge of one party alone. These are considered separately below.
3. Where a half-truth is told. A statement that is literally true but misleading because of what it leaves out imposes a duty to complete it, since the partial disclosure makes silence as to the rest deceptive.
4. Where a representation, true when made, becomes false before the contract is concluded. The maker must correct it, and failing to do so is equivalent to repeating a statement he now knows to be untrue.
5. Where a statute imposes disclosure, as with a company prospectus under the Companies Act, 2013 or disclosure obligations under consumer and securities legislation.

3.2 The second exception: silence equivalent to speech

The Explanation also covers the case where silence is, in itself, equivalent to speech. This arises where the circumstances give the silence a positive meaning, typically because the other party has said something that invites contradiction if it is wrong. The standard illustration is a buyer who tells the seller that he will assume a horse is sound unless the seller says otherwise; if the seller knows the horse is unsound and says nothing, his silence speaks.

4. Contracts Uberrimae Fidei

In a limited class of contracts the law imposes a positive duty of disclosure because the material facts lie peculiarly within the knowledge of one party. The other cannot realistically verify them, and the contract would be unworkable without candour.

• Insurance. The proposer must disclose every material fact bearing on the risk. The duty is now qualified by Section 45 of the Insurance Act, 1938, as substituted in 2015, under which a life policy cannot be called in question on the ground of misstatement or suppression after three years from the date it commenced, and within that period only on the grounds and with the procedure the section prescribes.
• Contracts of family settlement, where every member must disclose what he knows of the family property and the competing claims.
• Contracts for the sale of immovable property, where Section 55(1)(a) of the Transfer of Property Act, 1882 requires the seller to disclose to the buyer any material defect in the property or in his title of which he is aware and the buyer is not, and which the buyer could not with ordinary care discover.
• Contracts of suretyship, where the creditor must disclose facts materially affecting the risk the surety undertakes, and Sections 142 and 143 make a guarantee obtained by misrepresentation or by concealment invalid.
• Company prospectuses and allotment of shares, where disclosure is regulated by statute and by securities regulation.
• Contracts of partnership and of marriage, where the relationship itself presupposes candour.

5. Fraud and Misrepresentation Compared

6. The Position Stated Shortly

1. Fraud under Section 17 requires an act by a party, with his connivance or by his agent, done with intent to deceive or to induce the contract.
2. The five kinds are a false suggestion, active concealment, a promise without intention to perform, any other act fitted to deceive, and acts declared fraudulent by law.
3. Derry v. Peek: fraud is proved by the absence of honest belief; negligence, however gross, is not fraud.
4. A promise made without any intention of performing it is fraud, because a state of mind is a fact.
5. Mere silence is not fraud, per the Explanation and Shri Krishan v. Kurukshetra University.
6. Silence becomes fraud where there is a duty to speak, arising from a fiduciary relation, a contract uberrimae fidei, a half-truth, a representation that has become false, or a statutory requirement.
7. Silence is also fraud where it is in itself equivalent to speech.
8. Contracts of insurance, family settlement, sale of immovable property, suretyship and partnership carry disclosure obligations.
9. Fraud differs from misrepresentation in the maker's state of mind, in the availability of damages in deceit, and in the reach of the exception to Section 19.

7. Related Topics and Provisions