FREE CONSENT

Acc. to Section 10 free consent is an essential requirement of a contract. It states that: “All
agreements are contracts if they are made by the free consent of parties competent to contract, for a
lawful consideration and with a lawful object, and are not hereby expressly declared to be void.
Nothing herein contained shall affect any law in force in India, and not hereby expressly repealed, by
which any contract is required to be made in writing or in the presence of witness, or any law relating
to the registration of documents.”
DEFINITION OF FREE CONSENT
Section 14 of Indian Contract Act defines the free consent. It states that: “Consent is said to be free
when it is not caused by:
1. Coercion, as defined in Section 15, or
2. Undue influence, as defined in Section 16, or
3. Fraud, as defined in Section 17, or
4. Misrepresentation, as defined in Section 18, or
5. Mistake, subject to the provisions of Section 20, 21 and 22.
Consent is said to be so caused when it would not have been given but for the existence of such
coercion, undue influence, fraud, misrepresentation or mistake.”
VITIATING FACTORS AND THEIR EFFECT
Where consent to an agreement is caused by coercion, undue influence, fraud or misrepresentation,
the agreement is a contract voidable at the option of the party whose consent was so caused.
Voidable contract is defined under Section 2(i) which states that “an agreement which is enforceable
by law at the option of one or more of the parties thereto, but not at the option of the other or
others, is a voidable contract.”
If the contract made by the parties is under mistake, the agreement is said to be void. Void
agreement is defined under the Section 2(g). It states that: “An agreement not enforceable by law is
said to be void.”
Section 15 of the INDIAN CONTRACT ACT, 1872, defines coercion as follows -

Coercion is committing or threatening to commit an act that is prohibited by IPC, or any unlawful detaining or
threatening to detain, any property, to the prejudice of any person whatever, with an intention of causing any person into
entering a contract.

1. Explanation- It is immaterial whether IPC is in operation at a place where such act took place.
2. Illustrations-
a. A threatens B at gun point to sell his land to A.
b. A while in an English ship on high seas enter into a contract with B by intimidating B that is unlawful in India.
Later on A sues B of breach of contract in Calcutta. This is coercion.

WAYS IN WHICH COERCION MAY BE COMMITTED

Thus, as is clear from the definition, coercion may be committed in two ways-

a. By committing acts forbidden by IPC

This may include obtaining of consent at gunpoint, or threatening to burn a person’s house, with an intention to make a
person enter into the agreement. There are two most important cases on this-

 Chikham Amiraju vs Chikham Seshamma, 1918 - Husband threatened to suicide unless wife gave property to
his brother. This was held coercion.

 Askari Mirza vs Bibi Jai Kishori 1912 – A minor in a mortgage deed was threatened to make a compromise,
otherwise he was to be prosecuted for false misrepresentation of his age. He subsequently brought a suit. It
was held that: “Threatening a criminal prosecution is not coercion per se. It could be coercion if the threat is
to file false charges.”

b. By illegal detention of property

This may include unlawful detention or threating to detain property to make the other party enter into an agreement. The
most important case on this is-

 Astley v Reynolds, 1731 - Plaintiff had pledged his place for $10. When he went to take it back, pledgee
asked for $10 more. He paid the additional $10, but sued to get recover it back. It was held coercion.

DIFFERENCE IN POSITION OF ENGLISH AND INDIAN LAWS:

In English law, the word DURESS is used instead of COERCION. The main differences between duress and
coercion can be outlined as follows:
COERCION DURESS
Coercion revolves around any act against IPC, It covers any illegal act in general, be it tort,
i.e. a specific penal code. or crime.
Coercion may be against the person of the Duress is always against the person of a party
party or its property. or his near relative.
Coercion may be even against a stranger. Duress is always against the party, its child,
and parent or near relative.
Coercion may proceed from a non- party. Duress proceeds from a party to the contract,
or at least, at the time of contract party should
have knowledge of application of duress.
SECTION 16 of INDIAN CONRACT ACT, 1872, talks about Undue Influence, as follows—

(1) “A contract is said to be induced by ‘undue influence’ where the relations subsisting between the parties are
such that one of the parties is in a position to dominate the will of the other and uses that position to obtain an unfair
advantage over the other.”
(2) In particular and without prejudice to the generality of the foregoing principle, a person is deemed to be in a
position to dominate the will of another—
(a) Where he holds a real or apparent authority over the other, or where he stands in a fiduciary relation to the
other; or
(b) Where he makes a contract with a person whose mental capacity is temporarily or permanently affected by
reason of age, illness, or mental or bodily distress.
(3) Where a person who is in a position to dominate the will of another, enters into a contract with him, and the
transaction appears, on the face of it or on the evidence adduced, to be unconscionable, the burden of proving that
such contract was not induced by undue influence shall be upon the person in a position to dominate the will of the
other.

ILLUSTRATIONS
(a) A having advanced money to his son, B, during his minority, upon B’s coming of age obtains, by misuse of
parental influence, a bond from B for a greater amount than the sum due in respect of the advance. A employs undue
influence.
(b) A, a man enfeebled by disease or age, is induced, by B’s influence over him as his medical attendant, to agree to
pay B an unreasonable sum for his professional services, B employs undue influence.
(c) A, being in debt to B, the money-lender of his village, contracts a fresh loan on terms which appear to be
unconscionable. It lies on B to prove that the contract was not induced by undue influence.
(d) A applies to a banker for a loan at a time when there is stringency in the money market. The banker declines to
make the loan except at an unusually high rate of interest. A accepts the loan on these terms. This is a transaction in
the ordinary course of business, and the contract is not induced by undue influence.

ABILITY TO DOMINATE THE WILL OF THE OTHER

This is the sine qua non requirement for undue influence that the relationship between parties is such that one is in a
position to dominate the will of the other and does so, to make an agreement. For example- A spiritual advisor
inducing his devotee to devote all his property to him, is clearly, undue influence. This came before Allahabad HC:
 Mannu Singh vsUmadat Pandey 1890 - Spiritual guru induced the plaintiff, his devotee, to gift all his
property to the guru.
Also, another major case on this is
 Williams vsBaylex 1866 – A son forged his father’s signature on several promissory notes and paid them
into banking account. Bank manager threatened prosecution of son. Father, being afraid of bank manager,
entered into a contract to mortgage his house. This was held voidable, because the fears of the father were
stimulated.

REAL or APPARENT AUTHORITY

 Income tax officer in relation to assesse, magistrate or police officer in relation to the accused can be examples of
persons in authority.
Sometimes, the authority may not be real but if a person shows off as such then also it is applicable.

FIDUCIARY RELATIONSHIP
Every relationship of trust and confidence is a fiduciary relationship.
For example;
Solicitor - client, doctor - patient, spiritual guru – devotee.
A contract made between such parties would be voidable if the consent was obtained by abusing the consent of the
other party.

MENTAL DISTRESS
A person is said to be in distress when his mental capacity is temporarily or permanently affected. Such a person is
easily persuaded to give consent to a contract which may be unfavourable to him. The most important case law is:
 RaneeAnnapurnivsSwaminatha, 1910 - A poor widow who was in dire need to money to establish her right
to maintenance, was persuaded by a money lender to take loan at the rate of 100%. It was held to be undue
influence while a person was under mental distress and the court reduced the rate to 24%.

BURDEN OF PROOF

The person must show that the other party was in position of dominating the will and that he used that position to
gain advantage.

PRESUMPTION OF UNDUE INFLUENCE

In certain cases, when it is established that the defendant was in a position to dominate the will of the plaintiff, it
will be presumed that he must have used his position to obtain an unfair advantage. Thus, it will be up to the
defendant to prove that the plaintiff freely consented. For example,
 Lancashire Loans Ltd. vs Black, 1934: It was held that a daughter may not necessarily be independent and
may be under the influence of the mother.

The presumption of undue influence is raised at least in following cases:

A. Unconscionable bargains:
When one party is in a position to dominate the will of the other party and the contract is apparently
unconscionable, that is, unfair, the law presumes that consent must have been obtained by undue influence.
 Wajid Khan vs Raja Ewaz Ali Khan, 1891 - An old illiterate woman conferred upon her managing agent a
big pecuniary benefit without any valuable consideration under the guise of a trust. This was held to be under
undue influence.

B. Inequality in bargaining power:

 Lloyd's Bank vs Bundy - Farmer pledged his farmhouse for securing a loan for his son. Later bank tried to
take possession of the house. It was held that the contract might have been done under undue influence,
because the bank exploited the vulnerability of the father, caused by his desire to help his son.

C. Contracts with Pardanashin women:

A pardanshin woman is one who is “secluded from social intercourse”.
 A contract with a pardanashin woman is presumed to have been induced by undue influence. However, such a
woman must be totally secluded from ordinary society. In the case of Ismail vs Amir Bibi, 1902, a lady stood as
witness, put tenants, collected rents in respect of her house. She was held not a pardanashin woman.
Once it is shown that a contract is made with a pardanashin woman, the law presumes undue influence, and the
burden of proof lies on other party to show that no undue influence was used.
 Chand Singh v Ram Kaur, 1987- When a pardanashin lady of 70 years, having three daughters, was
supposed to have gifted her entire land to the defendant, who was the tenant of that land, it was held that
from the position of his possession of the land he must have dominated the woman.

DIFFERENCE BETWEEN COERCION AND UNDUE INFLUENCE

COERCION (Section 15) UNDUE INFLUENCE (section 16)

There is a clear threat involved and There is no outward sign on undue

the person being coerced knows it. influence and the person being
influenced may not realize it.

No relationship has to exist. A relationship that allows a person

to dominate the will of other must
exist.
 EEFFECTS OF SEC-15AND SEC-16
The contracts such formed, wherein the consent of the other party has been taken
either by coercion or undue influence, will become voidable at the option of party
whose consent was such taken. It can make it eithernull and void, or can enforce
it.

MISREPRESENTATION
A contract the consent to which is induced by the misrepresentation is voidable at the option of the
deceived party. Misrepresentation means misstatement of a fact material to the contract.
Misrepresentation is defined under Section 18 of The Indian Contract Act.
18. “Misrepresentation” defined – “Misrepresentation” means and includes –
1. The positive assertion, in a manner not warranted by the information of the person 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 any one claiming under him, by misleading another to his prejudice, or to the
prejudice of any one 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.
This section includes the following types of misrepresentation:
(1) Unwarranted Statements
When a person positively asserts that a fact is true when his information does not warrant it to be so,
though he believes it to be true, this is misrepresentation.
In a landmark case of Oceanic Steam Navigation Co v. Soonderdas Dharamsey, 1980; the defendants
chartered a ship from the plaintiffs, who stated that the ship was certainly not more than 2800
tonnage register. As a matter of fact the ship had never been in Bombay and was wholly unknown to
the plaintiffs. She turned out to be of the registered tonnage of more than 3000 tonnes.
It was held that the defendants were entitled to avoid the charterparty. “There was the positive
assertion by the plaintiffs about the size of the ship – an assertion not warranted by any information
the plaintiff had at the time, and which was not true.”
A statement is said to be warranted by the information of the person making it when he receives the
information from a trustworthy source. It should not be a mere hearsay. For example, B told the
plaintiff that one C would be the director of a company. B had obtained this information not from C
direct, but from another person, called L. The information proved untrue.
Where a representation acquires the status of being a term of the contract, and it turns out to be
untrue, the disadvantaged party may, not only avoid the contract but also sue for damages for
breach. Where in the course of negotiations for the sale of the lamb, the seller stated that the whole
of the lot was fully serviced, whereas this was not so, the buyer was allowed damages for the breach
of the warranty.
Take another example: Where the seller of a car stated that the car had done only 20,000 miles, the
representation being untrue, the buyer was allowed to recover compensation for the
misrepresentation.
(2) Breach of duty
Any breach of duty which brings an advantage to the person committing it by misleading the other to
his prejudice is a misrepresentation. This clause is probably intended to meet all those cases which
are called in the court of equity – cases of ‘constructive fraud’, in which there is no intention to
deceive, but where the circumstances are such as to make the party who derives a benefit from the
transaction equally answerable in effect as if he had been actuated by motives of fraud or deceit. For
example, in the case of Oriental Bank Corporation v. John Fleming, 1879, The plaintiff, having no
time to read the contents of the deed, signed it as he was given the impression by the defendant that
it contained nothing but formal matters already settled between them. The deed, however,
contained a release in favour of the defendants.
Accordingly, the plaintiff was allowed to set aside the deed. The court said that: ‘The defendant was
under no obligation, legally or morally, to communicate the contents of the deed. But the plaintiff
placed the confidence. It then became his duty to state fully without concealment, all that was
essential to a knowledge of the contents of a document.’
It was observed in Dynamics Corporation of America v Citizens and Southern National Bank, 1973,
that fraud had a broader meaning in equity than at law and an intention to defraud or to
misrepresent was not a necessary element. “Fraud, indeed, in the sense of a court of equity includes
all the acts, omissions and concealments which involve a breach of legal or equitable duty, trust or
confidence justly reposed and are injurious to another or by which an undue or unconscientious
advantage is taken of another.”
Example: A husband undergoing vasectomy operation was not warned that there was a slight risk of
his wife becoming pregnant, the surgeon was held responsible to the man and his wife for the pains
of unwanted pregnancy. The court said the plaintiffs were entitled to damages for distress, pain and
suffering.
Persons of full age and understanding who subscribe their signature to a document cannot be heard
to say that they had affixed the signatures on blank papers or that they signed without appraising
themselves about the recitals. Persons so imprudent as that have to take the consequences of such
imprudence.
(3) Inducing mistake about subject-matter
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 is also misrepresentation.
The subject-matter of every agreement is supposed by the parties to possess certain value or quality.
If one of the parties leads the other, however innocently, to make a mistake as to the nature or
quality of the subject-matter, there is misrepresentation.
For example: In a Bombay Case of Nursey Spinning & Weaving Co Ltd, 1880, the directors of a
company, while acting within their authority, sold on the company’s behalf a bill of exchange to a
bank. The company denied liability on the bill. But the bank was held entitled to recover the amount
of the bill from the company as money received to the use of the bank. “The bill was different from
what it was expressly represented to be by the agents of the company.”
In the case of Dambarudhar Behera v State of Orissa 1980, the Government auctioned certain forest
coupes. A part of the land was occupied by tenants. The Forest Department knew this fact but didnot
disclose it to the purchaser. The contract was held to be vitiated by misrepresentation. The
purchasers were allowed to recover damages for the loss.
Suppression of Vital Facts
Misrepresentation may also arise from suppression of vital facts. Cases of concealment or
suppression will fall either under sub – section (2), when it amounts to a breach of duty or under sub
– section (3) when it leads the other party to make a mistake about the subject-matter of the
agreement.
For example, in the case of R. v Kylsant 1932, the prospectus of a company stated that the company
had regularly paid dividends, which created the impression that the company was making profits,
whereas the truth was that the company had been running into losses for the last several year and
dividends could only be paid out of wartime accumulated profits. The suppression of this fact was
held to be a misrepresentation.
Take an another example, where in the negotiations for a marriage contract, those speaking for the
girl failed to disclose that she was suffering from epileptic fits, the engagement was held to be
voidable, a very material fact having been suppressed.
Similarly the fact that the girl was married before and was widow at the time of remarriage was held
to be a vital fact. Its non-disclosure enabled the husband to get a decree of nullity.
Suppression of Material facts
A fact is said to be material if it would affect the judgement of a reasonable person in deciding
whether to enter into the contract and, if so, on what terms. Misrepresentation should be of facts
material to contract. Mere “commendatory expression” such as men of business will habitually make
about their goods are not sufficient to avoid the contract. For example, in a sale of land, “a mere
general statement that the land is fertile and improvable, whereas parts of it had been abandoned as
useless, cannot, except in extreme cases, as, for instance, where a considerable part is covered with
water, or otherwise irreclaimable, be considered such a misrepresentation as to entitle a purchaser
to be discharged.”
In the matters of matrimony it has been held that qualifications of the spouse are a material fact.
Where the girl was in possession of high academic qualifications and agreed to matrimony because
she was told that her match was in an attractive job whereas he was only an apprentice in a factory,
the court ruled that it was a misrepresentation and, therefore, annulment of the marriage would
have to be decreed.
Peptic ulcer is a common disease which appears and which gets cured on proper treatment. This is
not a serious disease which may result in death and it is only in cases where proper care is not taken,
it may prove fatal. Therefore, non disclosure by the assured deceased that at a particular point of
time, he was suffering from peptic ulcer did not amount to deliberate suppression of the material fact
so as to enable the insurance company to repudiate the contract.
Expression of opinion
A mere expression of opinion cannot be regarded as a misrepresentation of facts even if the opinion
turns out to be wrong. But in some cases, a statement of opinion may also amount to
misrepresentation. It is often fallaciously assumed that a statement of opinion cannot involve a
statement of fact. In a case where the facts are equally well-known to both the parties, what one of
them says to the other is frequently nothing but an expression of opinion. But if the facts are not
equally well known to both sides, then a statement of opinion by one who knows the facts best
involves very often a statement of a material fact, for he impliedly states that he knows facts which
justify his opinion.
 It was confirmed by the Privy Council in Bisset v Wilkinson, 1927. Certain lands were sold. The
seller was aware that the land was required for sheep-farming and, therefore, expressed the
opinion that "the land had a carrying capacity of 2000 sheep". The land turned out to be unsuitable
for sheepfarming and the purchaser refused to pay the price.

Their Lordships found no ground for enabling the buyers to avoid the agreement. Where relief is
sought on the basis of misrepresentation, it is necessary that there should be representation of a
specific fact. A representation of fact may be inherent in a statement of opinion. But it depends upon
the material facts of the transaction, the knowledge of the parties respectively and their relative
positions, etc. The most material fact in the case was that both parties were aware that the vendor
had not and no other person had carried on sheep-farming in that unit of land. "In these
circumstances the purchasers were not justified in regarding anything said by the vendor as to the
carrying capacity as being anything more than an expression of opinion the

Where a claim was made through an advertisement that the defendants were the flight cabaret
performers in Europe, the court said that it was a statement of opinion. 'The hotel which engaged
them on the basis of the claim could not terminate the contract on the ground of misrepresentation.
An advertisement for sale of residential property claimed that foreigners were eligible to purchase it.
This was held to be the statement of an existing fact. There is a difference between an indiscriminate
praise and specific promises or of verifiable facts.

Representation or state of mind

A representation of one's state of mind is also a representation of fact. In Edgington v Fitzmaurice,

1885, the prospectus of a company misstated the pose to the money to be borrowed by issuing
debentures was going to be applied. The directors contended that the representation related to the
state of their mind as to what the money was going to be put and they could change their mind and,
therefore, it was not a misrepresentation of a specific fact. The Court of Appeal, however, pointed
out that the state of a man's mind is as much a as the slate of his digestion. A misrepresentation as to
the state of a man's mind is, therefore, a misstatement of fact.

The intention of the parties is very important in the matter of contracting, 'The intention of' the
parties govern in the making and in the construction of all contracts. If the parties so intend, the sale
may be absolute, with a warranty superadded or the sale may be conditional, to be null and void if
the warranty is broken.

Change of circumstances

In the case of Esso Petroleum Co Ltd v. Mardon, 1976, a petroleum company acquired a site on a
main road for constructing a petrol pump estimating its annual consumption to be 2,00,000 gallons
from the third year of operation. The planning authority, however, permitted the pump to be
erected only at the back side of the site which was accessible only from the side streets and not at all
visible from the busy main road and this considerably affected the sale potential. But even so they
failed to point this out to the lessee of the pump who in consequence invested money on the basis
of the originally intimated estimates and suffered loss. They were held liable for the plaintiff's loss.
The court laid down that where during the course of precontractual negotiations, one party, who
had special knowledge and expertise concerning the subject-matter of the negotiations, made a
forecast with the intention of inducing the other party to enter into a contract, and the other party
did so, the court can construe that the forecast was not merely an expression of opinion but as
constituting a warranty and accordingly they were liable for the breach of the warranty. Every
 person who offers an advice, information or opinion of this kind is under a duty of reasonable care to
see that it is true, and this duty was not limited to persons carrying on the profession or business of
giving advice.

Inducement

It is further necessary that misrepresentation must be the cause of the consent, in the sense that
but for the misrepresentation the consent would not have been given. The explanation to Section
19 provides:

A fraud or misrepresentation which did not cause the consent to a contract of the Party of whom
such fraud was practised, 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 by the other party. The plaintiff must
have been affected by the false representation. There would be no misrepresentation, even if the
advertisement was false, if the buyer had inspected the goods before buying them unless he was the
victim of some concealed defect which could not be known examination If a person to whom the
statement was not addressed voluntarily chooses to act upon it. he is not entitled to rescission
 Means of discovering truth
A party cannot complain of misrepresentation if "he had the means of discovering the truth with
ordinary diligence.” This is recognized by way of an exception stated along with Section 19. The
statement is as follows:

If such consent was caused by misrepresentation or by silence, within the meaning of Section 17,
the contract, nevertheless, is not voidable, if the party whose consent was so caused had the
means of discovering the truth with ordinary diligence.

A person who bought a quantity of rice, was precluded from alleging representation about its quality
because he lived very near the place where goods were lying and, therefore, might have discovered
the truth with ordinary diligence. But where the truth cannot be discovered with ordinary diligence
the party guilty of misrepresentation cannot rely on the defence. Thus, example, in a case the
director of a company falsely told a bank that the bill they were selling to the bank was one on which
the company was liable, it held that “no ordinary diligence would have enabled the bank to discover
that the company was not liable on the bill.”

A difficult question about this exception is that where a person has the means of discovering the
truth, but does not use them and contracts in reliance upon the statements made to him, whether
the contract would be voidable? In such cases the principle seems to be that if he relies upon those
means he cannot afterwards complain of the misrepresentation. But if he does not use the means
and relies upon the statements made to him, he can avoid. This was laid down by the court of Appeal
in Redgrave v Hurd, 1881. Here also a medical practice was under sale. The seller misrepresented
the income which it produced, but documents to the purchaser from which he could have verified,
but he did not do so and having only cursorily looked at them, purchased the business. On learning
the truth he sought to avoid the contract and was allowed to do so. Sir GEORGE JESSEL MR
remarked: "If a man is induced to enter into a contract by false representation, it is not sufficient
answer to him to say: 'If you had used due diligence, you would have found out that the report was
untrue. You had the means afforded you of discovering its falsity, which you did not choose to avail
yourself of.' One of the most familiar instances in modern times is this. Men issue a prospectus
containing false statements, and then say the contracts themselves may be inspected at the office of
the solicitors. It has always been held that those who accept those false statements as true are not
deprived of their remedy merely because they neglected to go and look at the contracts themselves.
Another instance with which we are familiar is a false statement as to the contents of a lease; in such
a case as a man saying that there was no covenant or provision in the lease to prevent the carrying
on, in the house to be sold, the trade which the purchaser was known by the vendor to be desirous
of carrying on therein. Although the lease itself might be produced at the sale or might have been
open to the inspection of the purchaser, it was held that the vendor could not be allowed to say:
'You are not entitled to give credit to my statement.' It is not sufficient, therefore, to say that a man
has had the opportunity of investigating the real state of the case, but has not availed himself of that
opportunity."
Fraud
Intentional misrepresentation of facts, speaking broadly is called “fraud”.
According to Section 17:
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.
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 a 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.
Explanation: mere silence is to facts likely to affect the willingness of a person to
enter into a contract is not fraud, unless the circumstances of the cases such that,
regard being had to them, it is the duty of a person keeping silence to speak,
unless his silence is, in itself, equivalent to speech.
Illustrations:
(a) A sells, by auction, to B, a horse which A knows to be unsound. A says
nothing to B about the horse’s unsoundness. This is not fraud in A.
(b) 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.
(c) 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.
(d) 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.

1. Assertion of facts without belief in truth

 To constitute fraudulent act, the suggestion or statement made must be of
fact, it must be false and person making it does not believe it to be true or
knows that it is false or doesn’t have faith in its truth.
If the statement made is not of fact, but of law it will not amount of fraud.
In a landmark case of Derry v Peek, 1889, Lord Herschell said: “ fraud is
proved when it is shown that a false representation has been made, -
a) Knowingly, or
b) Without belief in its truth, or
c) Recklessly careless whether it be true or false.”

In this case, a company’s prospectus contained a representation that the

company had been authorised by special act of Parliament to run trams by steam
or mechanical power. The authority to use steam was, in fact, subject to the
approval of the board of trade, but no mention was made to this. The board
refused consent and consequently the company was wound up. The plaintiff,
having bought some shares, sued the directors for fraud. But they were held not
liable.
They were not guilty or fraud as they honestly believed that once the Parliament
has authorised the use of steam, the consent of the board was practically
concluded. It follows, therefore, that the person making a false representation is
not guilty of fraud if he honestly believes in its truth. Does intentional miss
representation is of the essence of fraud.
2.Active concealment
Active concealment is something different from passive concealment. Passive
concealment means my silence is to material facts. An active concealment of a
material fact is a fraud.
The expression “any other act fitted to deceive” naturally means any app which is
done with the obvious intention of committing fraud. For example, husband
persuaded his illiterate wife to sign certain documents telling her that by them he
was going to mortgage her to lands to secure his indebtedness and in fact
mortgaged four lands belonging to her.
Another example, where the seller of property did not disclose to the Buyer
pending litigation about the property, the Buyer was allowed refund of his money
with six percent interest.
Mere silence
Ordinarily, mere silence is no fraud, even if its results to conceal “facts likely to
affect the willingness of a person to enter into a contract.” A contracting party is
under no obligation to disclose the whole truth to the other party or to give him
the whole information in this 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.
In the case of Shri Krishnan v Kurukshetra University, 1976, a candidate, who had
full knowledge of the fact that he was short of attendance, did not mention this
fact in the examination form. This was hell to be no fraud, it being the duty of the
university to scrutinize forms and to call for verification on information in case of
doubts. The university having failed to do so, was estopped from cancelling the
examination of the candidate.
A House was let out for 3 years without disclosing to the tenant that it was in such
a ruinous and dangerous state to be dangerous to occupy, a fact in the landlords
knowledge. When the tenant discovered this fact he applied to have the contract
set aside, arguing that the landlord should have disclosed the real state of the
house. The court didn’t allow the relief. There was no warranty that the house
was fit for immediate occupation. No representation was made, since there was
no obligation on the owner to say anything about the state of the house.
When silence is fraud
Silence may become deceptive in certain cases.
A.Duty to Speak (Contracts of uberrima fides)
Duty to speak arises where one contracting party reposes trust and confidence in
the other. A father, for example, selling a horse to his son must tell him if the
Horse is unsound, as the son is likely to rely upon his father.
Duty to speak also arises where one of the parties is utterly without any means of
discovering the truth and has to depend on the good sense of the other party. For
example, and Insurance Company knows nothing about the life of circumstances
of the assured. It is, therefore, the duty of the assured to put the insurer in
possession of all the material facts affecting the risks covered. A contract of
insurance is, for this reason, called a contract of absolute good faith.
Burden of proof lies on the insurance so that the fact misstated or suppressed
was of material nature and to the risks covered and that the same time was done
to cause misconception about the risk undertaken by the insurers.
In the absence of any such relationship there is no duty to speak and mere silence
even if it amounts to misrepresentation will be no fraud.
For example, in the case of Haji Ahmad Yarkhan v Abdul Gani Khan, 1937, the
plaintiff spent a sum of money to mark the engagement of his son. He then
discovered that the girl suffered from epileptic fits and so broke off the
engagement. He sued the other party to recover from them compensation for the
loss which he had suffered on account of the deliberate suppression of vital fact
which amounted to fraud.
B.Where silence is Deceptive
Silence is sometimes itself equivalent to speech. A person who keep silent,
knowing that his silence is going to be deceptive, is known as guilty of fraud.
Where, for example, the Buyer knows more about the value of the property,
which is a subject of sale, but prefers to keep the information from the seller, the
latter may void the sale.
C.Change of Circumstances
Sometimes a representation is true when made, but, it may, on account of a
change of circumstances, become false when it is actually acted upon by the
other party. In such circumstances, it is the duty of the person who made the
Representation to communicate the change of circumstances.
For example, in the English case of With v. O’Flanagan, 1936, medical practitioner
represented to the plaintiff that his practice was worth €2,000 a year. The
Representation was true. But 5 months later when the plaintiff actually bought
the practice, it had considerable gone down on account of the defendant’s
serious illness. It was held that the change of circumstances ought to have been
communicated.
D.Half-truths
Even when a person is under no duty to disclose a fact, he may become guilty of
fraud by non disclosure if he voluntary discloses something and then stops half
the way. A person may keep silence, but if he Speaks, a duty arises to disclose the
whole truth.
For example, in a US case of Junius Construction Corporation v. Cohen, 1931, the
plaintiff purchased a tract of land. The contract of sale stated that the land was
subjected to right of the borough to open two streets within the area. But as a
matter of fact the borough had the right to open 3 Streets.
Holding that the plaintiff had the right of rescission, Chief Justice said: “ we do not
say that the seller was under a duty to mention 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 fairy stop Halfway.”
3.Promise made without intention of performing
This is the third type of fraud included in the definition in section 17. To tie-up a
person to a promise with no intention of performing from one’s side and with the
intention of only preventing the other from dealing with the others, is an example
of a promise made without the intention of performing it.
A purchase of goods without any intention of paying the price is a fraud of this
species.
4.Any other act fitted to deceive
The Fourth Kind of fraud identified by section 17 is any act which is fitted to
deceive.
In a case before the Calcutta High Court where a practitioner cast aspersions on
the court and also on the opposite lawyer, the court cited generally the following
statement about the concept of fraud: fraud has been defined in section 17 of the
Contract Act, 1872. As per interpretation of the statute, two kinds of fraud are
mentioned, firstly actual of positive fraud which includes cases of intentional and
successful employment of any cunning, deception, or artifice, used to circumvent,
cheat or receive another and secondly, constructive or legal fraud which include
such contracts or acts as though not originating in any actual evil design or
contrivance to perpetrate a fraud yet, by their tendency to deceive or mislead
others, or to violate private or public confidence, are prohibited by law.
5.Any act or omission specially declared to be fraudulent
The last category i.e. fifth kind of fraud includes cases in which the law specially
declares an act or omission to be fraudulent. For example, the insolvency act and
companies act declare certain kinds of transfer to be “fraudulent preference”.
The fifth and the last category of frauds included in the definition of section 17 is
intended to cover all such acts which under any branch of law are regarded as
fraudulent. In solvency law there is, for example, the concept of fraudulent
preference and in the Transfer of Property Act, there is the concept of fraudulent
transfer.
Essentials of a fraud
1. An intention to deceive
2. Use of unfair means
3. Deliberate concealment of material facts
4. Abused position of confidence

Fraud in terms of insurance policy

Where the insured willfully gives answers which are untrue with a view to obtain
from them the policy of the Insurance of his life, they are in the nature of fraud.
For the avoidance of policy, the following three conditions should be followed:
A. The statement made by the insured must be on the material matter or
must suppress facts which were material to disclose.
B. The suppression must be fraudulent.
C. The insured must have known at the time of making the statement.

Difference between Fraud and Misrepresentation

Misrepresentation and fraud have many points in common. For instance, both
render the contract voidable; there is a false representation in both; in either case
it is necessary that the consent should have been caused by the fraud and
misrepresentation and finally, where there is a fraud by silence, the fact, that the
means of discovering the truth by ordinary diligence, is a good defence. Yet, there
are some differences which are noticeable:

FRAUD MISREPRESENTATION
1. Fraud is more or less an 1. Misrepresentation may be
intentional wrong. quite innocent.
2. Fraud, in addition to 2. Simple misrepresentation is not
rendering the contract voidable, a tort but under section 75 of the
is a cause of action in tort for contract act, a person who
damages. rightfully is rescinds a contract is
entitled to compensation for any
damage which he has sustained
through the non fulfillment of the
contract. It also enables the court
to award damages instead of
rescission.
3. Accepting fraud by silence, it 3. A person complaining of
does not lie in the mouth of the Misrepresentation can be met
person committing fraud to say with the defence that he had “the
that this victim was too easily means of discovering the truth
deceived or had the means of with ordinary diligence.
discovering the truth.
The principal difference between fraud and misrepresentation is that in one case
the person is making the suggestion does not believe it to be true, though in both
the cases it is misrepresentation of the facts.

Section 19 of Indian Contract Act, 1872

When consent to an agreement is caused by coercion, fraud or misrepresentation, the

agreement is a contract voidable at the option of the party whose consent was so caused.

A party to a contract whose consent was caused by fraud or mis-representation, may, if he

thinks fit, insist that the contract shall be performed, and that he shall be put in the position
in which he would have been if the representations made had been true.

Exception.-If such consent was caused by misrepresentation or by silence, fraudulent within

the meaning of section 17, the contract, nevertheless, is not voidable, if the party whose
consent was so caused had the means of discovering the truth with ordinary diligence

Illustrations:
(a) A, intending to deceive B, falsely represents that five hundred maunds of indigo are made
annually at A's factory, and thereby induces B to buy the factory. The contract is voidable at
the option of B.

(b) A, by a misrepresentation, leads B erroneously to believe that, five hundred maunds of

indigo are made annually at A's factory. B examines the accounts of the factory, which show
that only four hundred maunds of indigo have been made. After this B buys the factory. The
contract is not voidable on account of A's misrepresentation.

(c) A fraudulently informs B that A's estate is free from incumbrance. B thereupon buys the
estate. The estate is subject to a mortgage. B may either avoid the contract, or may insist on
its being carried out and the mortgage debt redeemed.
(d) B, having discovered a vein of ore on the estate of A, adopts means to conceal, and does
conceal, the existence of the ore from A. Through A's ignorance B is enabled to buy the estate
at an under-value. The contract is voidable at the option of A.

(e) A is entitled to succeed to an estate at the death of B ; B dies: C, having received

intelligence of B's death, prevents the intelligence reaching Al and thus induces A to sell him
his interest in the estate. The sale is voidable at the option of A.

Loss of Right of Rescission

1. By Affirmation
Where the party, after becoming aware of his right to rescind, affirms the contract, the right
of rescission is lost. Affirmation may be express or implied.
Long v Lloyd The defendant induced the plaintiff to buy his lorry by falsely convincing him
that it was in “excellent condition”. The plaintiff discovered some serious defects on the very
first journey itself, but accepted the defendants offer to bear half of the price of the repair.
The lorry completely broke down on the next journey and he claimed rescission.
The court held that first breakdown was the proof of false representation. But, instead of
asking for rescission then, he accepted the offer for repair and sent the lorry on second trip.
This amounted to final acceptance for better or for worse and thus extinguished any right of
the rescission remaining to the plaintiff after completion of the sale.

2. By Lapse of Time
Rescission must be claimed within reasonable time after discovering the misrepresentation.
Thus where shares were allotted to a person the basis of a false prospectus in July and in
December he moved to set aside the contract, it was held that the unexplained delay of five
months precluded him from obtaining the relief.
In respect of defenses of this nature, including that of mistake, it is necessary that they
should be raised while contract or immediately thereafter. Once the contract has run its full
period, such a plea may cease to be available.
3. Intervention of Rights of Third Parties
The right of rescission is lost as soon as a third party, acting in good faith, acquire rights
in the subject matter of the contract. Thus, where a person obtains goods by fraud
and, before the seller is able to avoid contract, disposed them off to a bona fide party,
the seller cannot then rescind.