National Law Institute University
Bhopal (M.P)
Law of Contract – I
Project on the Topic
“Silence Amounting To Fraud”
Second Trimester
Submitted By
Submitted To
Adhir Lot
Ms. Neha Sharma
2018B.A.LL.B43
Section – ‘A’
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National Law Institute University
Bhopal (M.P)
Law of Contract – I
Project on the Topic
“Silence Amounting To Fraud”
Second Trimester
Submitted By Submitted To
Adhir Lot Ms. Neha Sharma
2018B.A.LL.B
Section – ‘A’
CERTIFICATE
This is to certify that the research paper on silence amounting to fraud has been prepared and submitted by Adhir lot, who is currently pursuing his B.A.LL.B.(Hons.) at National Law Institute University, Bhopal in fulfilment of Law of Contracts - I course. It is also certified this is original research report and this paper has not been submitted to any other university, nor published in any journal date – Signature of the student ……………………………. Signature of the research supervisor …………………………..
CONTENTS
- INTRODUCTION....................................................................................................................
- ESSENTIAL OF FRAUD …………………………………………………………………...
- MERE SILENCE IS NO FRAUD
- CONTRACT OF UTMOST GOOD FAITH
- DISCLOSURE OF CHANGE IN STATEMENT
- DISCLOSURE OF HALF TRUTH
- DISCLOSURE REQUIRED BY STATUTE
- SILENCE IS EQUIVALENT TO SPEECH
- REVIEW OF LITERATURE
- CONCLUSION
- BIBLIOGRAPHY
INTRODUCTION
The term ‘Fraud’ is defined under section 17 of Indian Contracts Act, 1872.The concept of the fraud says, that when one party deliberately or wilfully compels the other party with an intention to deceive the other party that is known as the fraud. If one party knows about the thing that a certain statement or certain thing is not true and that party is deliberately with intention or with wilfully entering into the contract with the another party, it is said that that party has done a fraud with the another party, provided that party enters in the contract with this particular notion. According to Sec.17: ‘Fraud’ defined — ‘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 :-
- The suggestion, as a fact, of that which is not true, by one who does not believe it to be true;
- The active concealment of a fact by one having knowledge or belief of the fact;
- A promise made without any intention of performing it;
- Any other act fitted to deceive;
- Any such act or omission as the law specially declares to be fraudulent. As a rule mere silence is not fraud because there is no duty cast by law on a party to a contract to make a disclosure to the other party, of material facts within his knowledge. The Explanation to Section 17 deals with cases as to when ‘silence is fraudulent’ or what is sometimes called ‘constructive fraud.’ The explanation declares that “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 silence is, in itself, equivalent to speech.”
MERE SILENCE IS NO FRAUD
Mere silence as to fact likely to affect the willingness of a person to enter into a contract is not a fraud. Unless the circumstances of the case are such that, regard being had to, it is the duty of the person keeping silence to speak or unless his silence is in itself equivalent to speech. A contracting party is not obliged to disclose each and everything to the other party. KEATES V. LORD CADOGAN In this case A let his house to B which is knew was in ruinous condition. He also knew that the house is going to be occupied by B immediately. A did not disclose the condition of house to B. it was held that he had committed no fraud. A contracting party is under no obligation to disclose the whole truth to the other party or to give him the whole information in his possession affecting the subject matter of the contract. It is under this principle that a trader may keep silent about a change in prices. A seller, who puts forth an unsound horse for sale but says nothing about its quality, commits no fraud. Silence is not fraud unless:
- There is duty to speak. ▪ Contract of utmost good faith. ▪ (^) Disclosure of change in statement. ▪ (^) Disclosure of half truth. ▪ (^) Disclosure required by statute.
- Silence is equivalent to speech. Explanation – 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.
Illustrations
- A sells, by auction, to B, a horse which A knows to be unsound. A says nothing to about the horse's unsoundness. This is not fraud in A.
- B is A's daughter and has just come of age. Here, the relation between the parties would make it A's duty to tell B if the horse is unsound.
- B says to A-"If you do not deny it, I shall assume that the horse is sound." A says nothing. Here, A's silence is equivalent to speech.
- A and B, being traders, enter upon a contract. A has private information of a change in prices which would affect B's willingness to proceed with the contract. A is not bound to inform B. CONTRACT OF UTMOST GOOD FAITH A legal agreement requiring the highest standard good faith. "Uberrimae fidei" is Latin for "utmost good faith." Insurance contracts are the most common type of uberrimae fidei contract. Because the insurance company agrees to share the risk of loss with the policyholder, it is imperative that the policyholder act in good faith by fully disclosing all information that affects the insurance company's level of risk. It is a fundamental principle of law that utmost good faith must be observed by the contracting parties. Good faith forbids either party from concealing (non-disclosure) what he privately knows, to draw the other into a bargain, from his ignorance of that fact and his believing the contrary. Just as the insured has a duty to disclose, similarly, it is the duty of the insurers and their agents to disclose all material facts within their knowledge, since obligation of good faith applies to them equally with the assured. The duty of good faith is of a continuing nature. After the completion of the contract, no material alteration can be made in its terms except by mutual consent. The materiality of a fact is judged by the circumstances existing at the time when the contract is concluded. 1 It is the fundamental principle of law that utmost good faith must be observed by the contracting parties and good faith forbids either party from non-disclosure of the facts which the parties know. The insured has a duty to disclose and similarly it is the duty of the insurance company and its agents to disclose all material facts in their knowledge since the obligation of good faith applies to both equally. 2 (^1) United India Insurance Company Ltd. v. M.K.J. Corporation (^2) Modern Insulators Ltd. v. Oriental Insurance Co. Ltd.
T.S. Rajagopala Iyer v. The South Indian Rubber Works
FACTS: Plaintiff had applied for shares in. the respondent company on the basis of the prospectus issued on 20th January, 1937, containing, inter alia, the names of several persons as directors and specifying the sum of Rs. 40,000 as the minimum sum upon which the company would proceed to allotment of the shares. Before the allotment took place, there were changes in the directorate, on which the plaintiff appellant relied as one ground on which he. could withdraw his offer and decline allotment. This important change was made on 9th May, 1937, and two days later an allotment letter was sent, to the plaintiff appellant. Some correspondence ensued and eventually on 1st June the plaintiff appellant repudiated his offer to take the shares on the ground of the reduction of the minimum subscription. In his letter of repudiation he made no mention of the change in the directorate. He eventually brought this suit to recover the money paid with his application for shares, after the respondent company had refused to make any refund. HELD: If an application for shares is made on the faith of a statement which is true when made but which is not true when the shares are allotted, the applicant may refuse to take them. There has been a material change in the prospectus since he made his offer and he is then entitled to decide that with this material change the prospectus of the company are not sufficiently attractive to warrant him in subscribing his money. That was sufficient to entitle an allottee to avoid the allotment. (^3) T.S Rajagopal Iyer v. South Indian Rubber works LTD, (1942)2 MLJ 228.
DISCLOSURE OF HALF TRUTH
Even when a person is under no duty to disclose a fact, he may become guilty of fraud by non
- disclosure if he voluntarily discloses something and then stops half the way. a person may keep his silence, but if he speaks, a duty arises to disclose the whole truth. “everybody knows that sometimes half a truth is no better than a downright falsehood. In a US case 4 , for example , the plaintiff purchases a tract of land. The contract of sale stated that the land was subject to a right of the borough to open two streets within the area. But as matter of fact the borough had the right to open the streets. Holding that the plaintiff had the right of recession, Cordozo CJ said “ we do not say that seller was under a duty to mention that the projected streets at all. That question is not here. what we say is merely this, that having undertaken or professed to mention them , he could not fairly stop halfway” Gluckstein vs. Barnes FACTS : Promoters of a company had acquired a property intending its resale through the sale of shares in the company. In doing so the original directors made a substantial profit which they did not disclose (though it was discoverable). The company became insolvent and investors sought repayment of the hidden profit. The promoters purchased property for £140,000 and sold it to the company for £180,000. Their profit of £40,000 was disclosed in a prospectus inviting the public to buy shares but it did not disclose a further profit of £20,000, made when they purchased charges on the property at a discount which were later repaid. Held: The action succeeded. As promoters they were under a duty to make explicit declarations of the profits already made. The central fact in the history is, that while the object of the syndicate was to make profit out of the resale, it was a essential part of the enterprise, as originally designed and as actually carried out, that the same individuals who sold as syndicate should buy as directors. This was provided by the third head of the agreement which set up to syndicate, and it has a far-reaching effect at all stages of the (^4) Junius construction corpn v cohen (1931) 257 NY 393
was pointed out that there had been litigation between the plaintiff and his neighbour Champaklal in 1925 and a consent decree had been passed imposing restrictive conditions as to the user of the plaintiff's property, that is to say, the decree bound the plaintiff not to build on part of the open land at the back of the house and not to close certain windows in Champaklal's house. As to one of these windows the decree provided that it was not to be closed at all; as to the other it was to remain open until such time as the plaintiff desired to build up to that height. In view of these defects, or alleged defects, in the title the defendant refused to complete and demanded return of his deposit. HELD : The defect to be material must be of such a nature that it might be reasonably supposed that if the buyer had been aware of it he might not have entered into the contract at all, for he would be getting something different from what he contracted to buy. The question, whether a defect is patent or latent, presents more difficulty because the expression "ordinary care" is somewhat indefinite. A defect which can be seen on inspection is obviously not latent, for instance, the ruinous condition of a house, and it may be said generally that a defect should be regarded as capable of discovery with ordinary care if there is anything to put the buyer on inquiry which would disclose the defect, for instance a footpath across a meadow. The liability of this property to be compulsorily acquired may fairly be said to amount to a material defect. The buyer is entitled to say that he wants a house and not a right to compensation,
SILENCE IS EQUIVALENT TO SPEECH 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 speak2, or unless his silence, is, in itself, equivalent to speech. Explanation clearly mentions this exception. A person, who keeps silence knowing that his silence is going to be deceptive, is no less guilty of fraud.
Srikrishnan vs. Kurukshetra University
An examinee didn’t mention shortage of attendance in his examination form. University cancelled his examination on the ground of shortage of attendance. The court held that examinee was silent as to his attendance and university administration had means to obtain information about his attendance. It could have known by ordinary diligence Kurukshetra University was held liable.
CONCLUSION Active concealment of fact is fraud as defined in section 17(2) of the Indian Contract Act, 1872. However passive concealment is not fraud unless there is duty to speak or the silence is itself equivalent to speech. As a rule mere silence is not fraud because there is no duty cast by law on a party to a contract to make a disclosure to the other party, of material facts within his knowledge. The Explanation to Section 17 deals with cases as to when ‘silence is fraudulent’ or what is sometimes called ‘constructive fraud.
BIBLIOGRAPHY
i) WEBSITES:
- www.manupatra.com
- www.indiakanoon.org
- www.lexology.com
- e-lawresources.co.uk
ii) BOOKS:
- Contract and Specific Relief by Avtar Singh