This Article is written by Ishita Jain of 3rd Semester of B.A LLB (Hons.) of University Institute of Legal Studies, Panjab University, an intern under Legal Vidhiya
ABSTRACT
A contract is an agreement between two or more parties (individuals or groups) and is enforceable by law. We enter into various agreements in our daily life on a day-to-day basis but not all the agreements can be enforced by law. For instance, an agreement among friends to go out for lunch or movie etc. cannot be enforced by law but at the same time an agreement between a seller and buyer maybe a contract. Therefore, all contracts are agreements; however, all agreements are not contracts.
Section 10 of the Indian Contract Act lays down certain essentials for an agreement to become a valid contract. One of the essentials is the free consent of the parties to enter into a contract. Consent is said to be free when it does not induce coercion, fraud, undue influence, misrepresentation and mistake. If the contract is entered into under any of the above-mentioned factors it is not considered as a valid contract.
Keywords: Fraud, Mere Silence, Mistake, False statement of Fact.
INTRODUCTION
There are various forms of contracts entered into on a daily basis like that between companies, bailor and bailee, buyer and seller etc. Due to its wide application, it is important to understand the validity of a contract. Therefore, concepts like fraud and mistake require due attention.
Fraud is mentioned under section 17 of the Indian Contract Act. It is an act done in order to deceive another party or to induce it to enter into a contract. The party intentionally deceives another party. Mistake is mentioned under section 20 of the Indian Contract Act. It occurs when both the parties to a contract misapprehend a fact essential to the agreement.
A contract becomes voidable at the option of the aggrieved party, if the consent has been obtained by fraud. However, if the consent is due to mistake as to a matter of fact, then it is void.
FRAUD
Fraud is defined as an intentional misrepresentation done by a party to a contract or with his connivance or his agent in order to deceive or trick another party or his agent. It is done either by letter or words. It is synonymous with words like deception, deceit, forgery, trickery etc. The person who pleads for the contract to be annulled on the basis of fraud has to plead and mention the instances or circumstances which lead to the commission of fraud.
Essentials of Fraud:
- False statement of fact
- Person furnishing the statement does not believe it to be true
- Intention to deceive or induce the other party into a contract
In the case of Derry vs Peek[1], it was laid down that to constitute fraud a representation must be made knowingly, without believing it to be true or thoughtlessly whether it be true or false.
The acts or circumstances that constitute fraud include:
- False Statement of Fact:
Section 17(1) states that suggestion of an untrue fact by the one who does not believe it to be true leads to the commission of fraud. To constitute fraud there should be a statement of fact which is not true, mere expression of an opinion is not enough.
In Ram Bai vs Life Insurance Corporation of India[2], the plaintiff filed a suit to claim Rs 25,000/- on the basis of the insurance policy of her deceased husband. However, the claim was dismissed by the court because the husband at the time of taking the insurance was 60 years old and well beyond insurable age. He intentionally made a false statement that his age was 48 years to take the insurance policy, thus, amounting to fraud. Therefore, it was held that the insurer is entitled to avoid the policy.
- Active Concealment:
The non-disclosure or concealment of a fact by a person having knowledge of the fact amounts to fraud as mentioned under section 17(2). The person may be endowed with a duty to divulge the facts to the other party but refrains from doing so. There is an effort to conceal the truth and make the other party believe something which in fact is not true. It may occur in different ways like through actions, words, letters etc. For instance, the alteration of tax statements to veil assets, gluing together pieces of an earthen pot to hide the cracks from the buyers etc are examples of active concealment.
- Promise made without an intention to perform:
As stated in section 17(3), a person who makes a promise is deemed to have an underlying intention to perform the same. However, if while entering into a contract there is no intention to perform it, then it amounts to fraud. For instance, a man who is bankrupt takes a loan without any intention to repay, then it amounts to fraud.
- Any Other Act fitted to deceive:
Section 17(4), includes all those acts which otherwise don’t come under the ambit of the earlier three clauses.
- Declared fraudulent by law:
Section 17(5), states those cases in which the law declares certain act or omission as fraudulent. In certain cases, the law obliges a person to perform certain duties and the failure of which is deemed as fraud.
For instance, the Transfer of Property Act, 1882 declares certain acts or omissions on the part of the buyer and seller as fraudulent.
- Wrong Intention:
Scienter means intention or knowledge. It is derived from the Latin word scire which means to know.[3] To constitute fraud, it is important that the person deceives another person intentionally. If the intention is absent, then there is no fraud.
For instance, if there is a false statement, however, the person is not misled or enters the contract on other basis, it would not amount to fraud.[4]
Also, if there is a false statement but the other party has the means to know the truth, there is no fraud. The false statement should be for the party being misled. If a third party enters into a contract based on the misleading statement which wasn’t meant for them that does not amount to fraud. For instance, if A makes a false statement to induce B into a contract, but C believing that statement enters into a contract with A. This would not be considered as fraud on part of A, as the statement was meant for B not C. There was no intention to deceive C.
MERE SILENCE
Passive concealment of a fact does not amount to fraud unless there is a duty to speak or if silence itself amounts to speech. In such a case, a party simply remains silent as to a matter of fact which must be revealed, however, there is no affirmative effort to hide the truth or create a false impression on the mind of the other.
For instance, in cases of sale and purchase of goods, the rule of caveat emptor is applied i.e., buyer beware, meaning that the buyer should be careful while purchasing goods. The seller is under no obligation to disclose the defects in his goods. If the seller gives a false claim as to the standard of the goods, it would come under fraud, however, remaining silent as to the defects is no fraud.
In Shri Krishan vs Kurukshetra University[5], A was a candidate of L.L.B. exam. He did not mention the fact that he was short of attendance and neither did the University authorities ascertain the truth. The supreme court held that the candidate did not commit fraud as merely remaining silent as to a matter of fact does not lead to fraud.
Exceptions to this rule occur when:
- There is a duty to speak – In certain cases, the circumstances are such that the party remaining silent is under a duty to disclose the facts, remaining silent in such cases amounts to fraud.
The contracts which are entered into on the basis of uberrima fides i.e., utmost good faith, are backed by an unequivocal duty to disclose all the facts. Remaining silent or non-disclosure is seen as equivalent to fraud.
In a case, A was suffering from a heart ailment since few years, however, while taking the insurance he did not mention about the same and took the insurance. A few months later, he died of his ailment. It was held that A was under a duty to disclose all the facts and on his failure to do so, the insurance claim is repudiated.[6] However, even in insurance cases, non-disclosure of facts which are immaterial to the policy, do not make the contract voidable.
In cases of marriage, there should be full disclosure of the material facts that relate to the parties to marriage. Non-disclosure in such cases leads to fraud. For instance, A is a divorcee or mentally unstable and without disclosing this fact he marries B. It would amount to fraud.
Half-truths are also considered as fraud, as conveying only a part of the fact also, creates a false impression.
In the case of Briess vs Wooley[7], it was held that there is also a duty to disclose changes, before the other party acts upon the same, because if the change is not communicated then it would amount to a fraudulent act.
- Silence corresponds to speech- In certain cases silence is considered as equivalent to speech, thereby amounting to fraud. For instance, A says to B that if you don’t deny it, I shall assume that the pot is of good quality and solid build. B remains silent. Therefore, the silence of B is considered equal to speech. So, if the pot does not turn out to be the same, it would be considered as fraud.
However, if the other party has the means to discover the truth with ordinary diligence but fails to do so, that would not come under the purview of fraud.
MISTAKE
A contract which is entered into due to some erroneous belief held by the parties to the contract, is said to have been caused by mistake. It is believed that if the misunderstanding of facts had not been there, they would not have entered into a contract in the first place. Therefore, if both the parties to a contract are under a mistake of fact which is considered essential to constitute an agreement, the agreement is void.
Mistake may occur when there is no consensus ad idem. If the parties to a contract do not agree to the same thing in the same sense i.e., there is no meeting of minds, it is deemed to be no consent on their part. Such a contract is not a valid contract.
For instance, A intends to buy 20kg of jasmine rice from B at Rs 100. B accepts the offer to sell jasmine rice at 100/kg. In this case there is a mistake of fact relating to the price. Therefore, the contract is void.
Section 20 states that to constitute mistake there should be:
- Bilateral Mistake- Both the parties to a contract must be under a mistake. As per section 22, if only one of the parties is under a misconception as to a fact, i.e., unilateral mistake, that does not affect the validity of the contract.
- Mistake of fact – Mistake should be related to the facts of the contractual agreement and not related to any law in force in India. Mistake of law is not a valid ground to render a contract as void, because it is expected from each individual to know the law of the land. The maxim of ingnorantia juris non excusat which means ignorance of law is not excused, is applied. However, a mistake as to a foreign law which is not implemented in India is considered as equivalent to a mistake of fact, thereby rendering the contract void.
- Mistake essential to the contract- A mistake of a fact should be essential to the agreement. It has to be ascertained whether a particular fact is essential to the agreement or not. Instances of mistake of fact essential to the agreement:
- Existence of subject matter- If the parties to a contract are under a mistake as to the existence of the subject matter, the contract is void. If the subject matter is missing then the contract has no purpose and cannot be performed. However, in the case of Smith vs Hughes,[8] it was held that a mistake as regards to the quality of the subject matter cannot render the contract void. So, if there is clear identification of the subject matter but not the quality, the agreement is still valid.
- Possibility of performance- If the parties enter into a contract and by mistake include such terms, the performance of which is not possible, the agreement would be declared as void.
- Mistake relating to title- In certain cases the parties to a contract maybe under a mistake as to the title to the goods sold. For instance, A may already be the owner of a land which B may purport to sell to A. Here, if both the parties are under a mutual mistake, the contract would be held as void.
- Mistake as to promise- If due to a mistake the promise does not reflect the true nature or purpose of the agreement, then it would be void.
- Mistake of Identity- It occurs when the parties are under a mistake as to the identity of the parties. However, when the parties are contracting face to face, then there occurs no mistake as to identity. This was also held in the case of Philps vs Brooks Ltd[9].
CONCLUSION
A contract is valid, if it is entered in consonance with section 10 of the Indian Contract Act. A contract which does not enshrine the free consent of the parties can be avoided. If the consent is influenced by fraud, the agreement is voidable at the option of the party whose consent is so obtained. In fraud a party intentionally deceives or induces the other party to enter in a contract. Mistake is of two types: Mistake of law, in this, the contract is not void as everyone is expected to know the law of the land. Mistake of fact, both the parties are under a misconception as to a fact essential to the agreement, thereby rendering the contract as void.
REFERENCES
- 15th Edition, R.K. Bangia, Indian Contract Act, Allahabad Law Agency (2016)
- 13th Edition, Avatar Singh, Contract and Specific Relief, Eastern Book Company (2022)
- https://blog.ipleaders.in/fraud-in-contracts-section-17-of-the-indian-contract-act/ visited on 1-09-23
- https://blog.ipleaders.in/mistake-under-contract-law/ visited on 2-09-23
[1] (1889) 14 A.C. 337.
[2] AIR 1981 MP 69
[3] https://en.wikipedia.org/wiki/Scienter Visited on 2-09-23
[4] Smith vs Chadwick, (1884) 9 A.C. 184
[5] A.I.R. 1976 S.C. 376
[6] P. Sarojam vs L.I.C. of India, A.I.R. 1986 Ker. 201.
[7] (1954) A.C. 333
[8] (1871) L.R. 6 Q.B. 597
[9] (1919) 2 K.B. 243
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