Definition: In general, fraud refers to wrongful deception committed intentionally, by using unfair means such as trick or lying, in an attempt to secure a financial gain or to unlawfully deprive the other party of the money, property or legal rights.
In contract law, fraud is one of the elements which vitiates free consent of the parties. Fraud implies a false statement of fact made intentionally or knowingly by one party which has to be acted upon by the other party believing it to be true.
It includes any wilful representation which instigates the other party to enter into a contract, which resulted in deception either monetary or personal.
Essential Elements of Fraud
Fraud covers any act undertaken by a party to the contract or with his complicity, intending to deceive the other party or to induce him to enter into a contract. The essential elements of fraud are:
- Wilful representation or assertion which is false. Nevertheless, keeping silence would be considered as fraud or deliberately hiding a fact will also be considered as fraud.
- Representation is made about a fact.
- Representation or statement is made prior to the conclusion of the contract so as to instigate a party to act upon it.
- The party making the representation is having the prior knowledge that it was not true or not having the belief in its truth or carelessly as to whether it is true or false.
- The other party to the contract must have instigated and acted accordingly upon the assertion.
- The other party must have trusted on the assertion made and got deceived, as a result of which they suffered a loss.
Effect of Fraud
If the consent of a party to contract is induced by fraud, it becomes a voidable contract at the option of the party deceived. The remedies available to the party are:
- The aggrieved party can cancel the contract within the stipulated time.
- The aggrieved party can sue the party making assertion and claim damages.
- The aggrieved party can demand the performance of the contract, only if he/she shall be brought in a position in which he/she (the aggrieved party) would have been had when the assertion made was true.
- John purchases 10 rice bags from Joseph, who is a wholesaler of rice, without any intention of paying for it. The contract is voidable, at the option of Joseph.
- Alex goes to Ben’s house, as an investment manager and presents him a scheme in which he can deposit the amount which will be doubled in just one month. Ben immediately transfers Rs. 50,000 in his account. Alex ran away with the money, and it amounts to fraud.
It must be noted that mere silence is not considered as a fraud when the party to the contract is not obliged to reveal the entire truth to the other party and also when it is not the duty of the party to reveal the facts which both the parties are having knowledge of.
However, silence is considered as a fraud when the circumstances are such that it is the duty of the party keeping silence to speak, such as in case of a fiduciary relationship, contracts of insurance, contracts of marriage, contracts of sale of land, contracts of family settlement and share allotment contracts.
Furthermore, where the silence of the party to contract is equivalent to speech, then also it is regarded as fraud.
Note: Fraud is not only covered in the Contract Act, rather there are some other acts prevalent in all the countries, which declares specific acts in the category of fraud.