Difference between Fraud and Misrepresentation under Indian Contract Act, 1872

In our daily lives, we use the term fraud to refer someone who intended to deceive others, in legal terms section 17 of the Indian Contract Act, 1872 defines fraud as any act which includes any of the following acts committed by a party to a contract , or with his connivance, or by his agent, with the intent to deceive another party thereto or his agent, with the intent to deceive another party thereto or his agent, or to induce him to enter into the contract-

a) the suggestion, as a fact, of that which is not true, by one who does not believe it to be true

b) the active concealment of a fact by one having knowledge or belief of the fact;

c) a promise made without any intention of performing it;

d) any other act fitted to deceive;

e) any such act or omission as the law specifically declares to be fraudulent.

Silence in a contract which can affect the willingness of a person to enter into a contract does not amount to fraud until circumstances are different. We will discuss this in detail in this article.

Misrepresentation is defined under Section 18 of the act stating that it 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 of the person committing it, or any one claiming under him, by misleading another to his prejudice, or to the 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 agreement.

A false statement made without any intention to deceive results in misrepresentation. This is essential that the person who made the statement must believe that it is true.

Section 17 of the Indian Contract Act, provides two essentials to prove that an act is fraud

1. A person should make a false statement having the knowledge that the facts are false
2. The second condition is that there should be a wrongful intention to deceive the other party

There should be an active concealment of fact which was the duty of the person to reveal. Fraud takes place whenever one person causes another to act on a false belief which he does not himself believe to be true.

The representation should be a fact not an opinion though in some cases the opinion might be treated as fact, it should be such that it would have prevented a reasonable man from entering into a contract. In a case of 2005 Lilly Kutty vs Scrutiny Committee a false certificate was obtained to take unfair advantage; it was held that fraud vitiates every solemn act.

To prove in a case that fraud has taken place it must be proved that the defendant party had prior knowledge of the false statement. Mere ignorance of truth which later on turns out to result in fraud will make the person liable. Even if the statement is made by the person without any deliberate reasons, absence of truth in the statement will prove him guilty.

ACTIVE CONCEALMENT OF FACT [Section 17(2)]

In a contract generally there is a duty to speak of one party, active concealment is a situation where this party conceals the fact that they have a duty to disclose. Active concealment and passive concealment are two different things, passive concealment refers to situations of the past when the party had a duty to speak and remain silent.

If a contract was formed under conditions involving active concealment it can render the contract void or voidable. The parties to the contract need to consent this contract later on in order to make it valid. Further the party responsible for active concealment might be held for civil wrong and liable to pay fines.

PROMISE MADE WITHOUT ANY INTENTION TO PERFORM [Section 17(3)]

When a person makes a promise to another without any intention to perform it in future it results in fraud. An example can be taking loans without any intention to repay in future.

SILENCE DOES NOT RESULT TO FRAUD

Mere silence in any situation which can affect the willingness of a person to enter into a contract is not fraud, unless circumstances arise that it becomes the duty of the person who is silent to speak. Non disclosure of a fact cannot result in fraud. We can understand this with a case law in Shri Krishan vs. Kurukshetra University a candidate for LLB part 1 exam was short of attendance and did not mention the same in his examination form. The university authorities and head of law department did not pay much heed to this and did not ask for any further information. In this case the Supreme Court held that there was no fraud on the part of candidate and the university had no power to cancel his candidature on this ground.

Section 18 of the Indian Contract Act talks about misrepresentation as discussed above here we will discuss it clause by clause in detail.

The first clause of section 18 talks of positive assertion which leads us to interpret it in two ways-

1. Innocent Misrepresentation

It is used to depict misrepresentation which has no element of fraud and Negligence in it.

2. Negligent Misrepresentation

It is made when one misrepresents a fact baselessly without any grounds to believe it to be true as happened in the case of Derry vs. Peek. The Second of clause of section 18 was intended to meet the cases which do come to court for inquiries in other words “constructed fraud”. There is no intention to deceive as such, but circumstances arise that make the party which derived benefit from the act be answerable to court. This statement was observed in the case of Oriental Bank corporation vs. John Fleming. Another thing to note down is English books always referred to misrepresentation of facts and not that of law; it was understood that misrepresentation of law is done in order to avoid a contract.

If we try and figure out the main or the key differences between the two they are

1. Fraud is an intentional misrepresentation made in order to deceive someone, misrepresentation on the other hand is an innocent statement without any intention to deceive.
2. Intention differentiates the two, it is an important element as fraud is intentional while misrepresentation is not
3. The aggrieved party in fraud has right to sue but it is not so in misrepresentation
4. The party who made a fraudulent statement cannot take the defense that the other party had means to discover the truth, in cases of misrepresentation this defense can be taken.

The principal difference between fraud and misrepresentation is in one case the person stating the facts believes it to be true and in the other case, he believes it to be true. Intention to deceive is essential in cases of fraud. In both the cases the contract can be avoided but in fraudulent silence or misrepresentation contracts cannot be avoided if the other party had means of discovering the truth with the help of ordinary diligence.

Noorudeen vs. Umairathu Beevi

Noorudeen vs. Umairathu Beevi, is an example where the transaction was set aside later on and discovered that it was done on the grounds of fraud and misrepresentation. The defendant who was the son of plaintiff got a document executed by the plaintiff describing it as the hypothecation deed of property. Actually it was a sale deed of plaintiff’s property, it was held in this case that plaintiff was a blind man and the consideration was an inadequate amount for the property, the contract was executed by fraud and misrepresentation and therefore set aside.