“A THOROUGH INVESTIGATION IN THE FIELD OF FRAUD, MISREPRESENTATION & HALF TRUTH“

Author:- Neha Ladhani

Fraud is a term common to us but it has other criteria involved too. Many may not be aware of the very fact that silence could also cause fraud. Yes! That is what our legislators have defined in section 17 of the Contract Act, 1872. Let us first understand what Fraud is.

As defined under section 17 of the Indian Contract Act, 1872 “fraud is any act committed by the parties to the contract or their agents with the intention to deceive or induce the other party to enter into the contract”.

ELEMENTS OF FRAUD

• The suggestion as to the fact which is made by the party believing it to be not true.
• The active concealment of the fact of which the party had knowledge.
• Any promise made without any intention to fulfil it.
• Any other act or omission which is considered to be fraudulent or law describes it to be fraudulent.

Now the question arises as to How and Where silence can cause fraud. For that exceptions have been mentioned in the said section which read as

Section 17(5) Indian Contract Act , 1872

“Mere silence as to facts likely to affect the willingness of a person to enter into a contract is not fraud unless the circumstances of the case are such that, regard being had to them, it is the duty of the person keeping silence to speak, or unless his silence, is, in itself equivalent to speech.

Illustration: A says to B, if you don’t reply within 2 days, I shall consider your acceptance with regard to the order you made. Here, silence will amount to speech.

As described in this section silence would amount to fraud in certain situations which are mentioned below.

UBERRIMA FIDES: Doctrine of utmost faith

This is a Latin phrase that mainly applies to insurance contracts. Contracts of Insurance involves the question of faith that the applicant has in the policyholder. Here, the policyholder is bound to disclose all the relevant information regarding the policy so the applicant can take a decision in his own good and not fall prey to a misrepresentation made by the policyholder. The applicant has all the rights to know about the risks involved or any other history of events if so occurred.  So, he/she can decide either to take up such a policy or not. Moreover, there arises a duty to speak of the person selling their policy or any other person of the same function. Where it can be made out of the facts that it was the duty to speak but the seller avoided it intentionally which led to the loss of other parties

WHERE SILENCE IS EQUIVALENT TO SPEECH

Where the person keeping silence has knowledge that it will mislead the other party then it will amount to fraud. E.g: a person knowing the fact that keeping silence will amount to his acceptance of certain terms which he knows are false, will amount to fraud.

illustration: Mr Z asks Y to respond in two days if he does not want to keep the ornaments or otherwise he will believe that Y wants to keep them. In such situations, silence is equivalent to speech.

HALF TRUTH

Silence amounts to fraud when a person voluntarily tells facts and stops mid way or does not speak the whole truth or voluntarily conceals the half facts .

The half-truth is when all the facts are not disclosed which may amount to a loss of the other party. It is done intentionally to deceive the other person or to induce him to enter into the contract by not disclosing the whole facts knowing which the other party may refrain from entering into the contract.

E.g: “This company did not provide me good services.” This statement would amount to half-truth if the person saying this did not mention the fact that he did not pay the premium on time. Thus, a half-truth is when a substantial part of the information is omitted in order to conceal something which may lead to loss or may involve the other party at risk.

GLUCKSTEIN V. BARNES^[1]

Promoters of the company gained the property with an intention to resell it through the shares in the company. In doing so the directors of the company made profits which they did not disclose or rather we say they intentionally hid, though they were discoverable. The company became bankrupt and so the investors sought repayment of the hidden profit. The action succeeded. As it was held that the promoters were under the duty to disclose the profits made.

Another example to explain the concept would be SCHNEIDER V. HEATH^[2]: In this case, the boat seller was held liable to conceal the very substantial facts which led to the loss of the buyer. It was observed that the boat seller knew that the boat was not in a position to be in the sea. Moreover, he claimed that the ‘hull’ was in a good condition, in fact, it was all rotten. The captain of the boat kept it afloat to avoid the discovery of truth. So, the court held that it was an act of concealment of facts or misrepresentation and thus the contract should be set aside.

FRAUD AND MISREPRESENTATION

Fraud and misrepresentation are concepts that are often mixed up with each other. However, they are not the same. Fraud amounts when a party deliberately says a misstatement in order to deceive the other party whereas in misrepresentation the party making the misstatement does not have the idea of it being false or untrue rather they believe it to be true and there is an absence of any intention to deceive the other party.

In fraud, one can sue for damages in case of the loss is suffered whereas in misrepresentation it is not the case always as the party has no intention to deceive. However, in both cases, the contract is voidable at the option of the other party. In special cases, Misrepresentation can be caused by not telling or omitting to tell the substantial fact, thus leading other parties to enter into a contract.

Fraud is when the person stating the wrong facts has the knowledge of true facts but he still chooses to deceive the other person whereas Misrepresentation is when the person stating the wrong facts himself consider the statement to be true of facts. Moreover, Fraud is dealt with under section 17 and Misrepresentation is dealt with under section 18 of the Indian Contract Act, 1872, thus making the two differ from each other.

There are basically three main types of Misrepresentation:

• INNOCENT MISREPRESENTATION:
  It is when the person making a false statement believes it to be true or he himself has no knowledge of its falsity. It is voidable at the option of other parties when discovered. Thus, such a contract can be rescinded or cancelled.
  OSCAR CHESS V. WILLIAMS^[3] In this case the defendants sold a car to claimants worth 290 pounds and provided them with a copy of the first registration of the vehicle which stated that it was registered in 1948. However, later after eight months, the claimants discovered that the car was actually registered in 1939 and thus was only worth 175 pounds. The defendants here actually believed that the car was a 1948 model. It was held that it was an innocent misrepresentation.
• NEGLIGENT MISREPRESENTATION:
  It is when the person making the false statement has been negligent enough that he did not take reasonable care to discover the truth. Thus, leading to misrepresent the other party. Here, the element of ‘reasonable care’ is very important to prove the negligent act of the party stating the facts. The remedy for such action is that such contracts can be rescinded or there may be damages provided if the facts and circumstances of the case permit so.
  HOWARD MARINE V. ODGEN^[4]
  In this case, the defendants, the civil engineering company, hired two ships, barges, from the claimants to carry clay out of the sea. For that purpose, they entered into the contract with the claimants who during the negotiations had represented that the barges had the capacity to carry 1600 tones on the basis of the information mentioned in Lloyd’s register. An exception clause was also added in the contract which stated that the acceptance of barges would amount to satisfaction of the defendants that the barges are fit for their purpose. Later, the defendants discovered that the real capacity of the barges was 1055 tonnes, thus paid only the partial amount of the price and refused to pay the remaining. Thus, the claimants brought an action against the defendants claiming the remaining amount. The court here ruled in favour of claimants as the defendants had the opportunity to discover the real capacity which they did not utilize and thus were held liable under section 2(1) of the Misrepresentation Act 1967.
• FRAUDULENT MISREPRESENTATION:
  It is when the facts are presented wrongly or say are misrepresented even after having the knowledge of such true facts, which may cause loss to the other party or may induce the other party to enter into the contract. Such contracts are void and damages can be provided as a remedy.

CONCLUSION

In brief, we can conclude that silence can act both as an offence and as defense depending upon the circumstances and facts of each case. Moreover, it may lead to deceive the other party as in fraud and misrepresentation. Though both the concepts are different but the end of both is the same loss of the other party or else the other party without giving their true consent is induced to enter into contracts. Our legislators have provided remedy for both the acts, thus protecting the other party. This being a civil offence offers damages or rescinding of contract or both as a remedy.

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Neha Ladhani, a 4th-year student, currently pursuing law from GLS Law College, Ahmedabad. She has always been eager to know more and achieve more.

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[1] (1900) AC 240

[2] (1813)3 Camp 506

[3] (1957) 1 WLR 370

[4] (1978) QB 574