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MB0051 Q.1 Distinguish between fraud and misrepresentation.

A false statement made knowingly or without belief in its truth or recklessly careless whether it be true or false is called fraud.
Sec. 17 of the Act instead of defining fraud, gives various acts which amount to fraud.
Sec. 17: Fraud means and includes any of the following acts committed by a party to a contract or with his connivance or by his agent to induce him to enter into contract:
1) The suggestion that a fact is true when it is not true by one who does not believe it to be true. A false
statement intentionally made is fraud. An absence of honest belief in the truth of the statement made is essential to constitute fraud. The false statement must be made intentionally.
2) The active concealment of a fact by a person who has knowledge or belief of the fact. Mere non-disclosure is not fraud where there is no duty to disclose.
3) A promise made without any intention of performing it.
4) Any other act fitted to deceive. The fertility of man’s invention in devising new schemes of fraud is so great that it would be difficult to confine fraud within the limits of any exhaustive definition.
5) Any such act or omission as the law specially declares to be fraudulent.
Essentials of fraud:
1) Making a false suggestion: There should be a false suggestion by a party who knows it to be false or the statement must have been made recklessly without caring to know its truthfulness. The false suggestion can be made by conduct of the party.
2) The representation must be of a fact. The false suggestion or representation must be of a fact and not of opinion or intention.
Commendatory explanations as found in advertisements that a ‘soap washes whiter than white’ do not constitute representations of fact. It is usual for a trader to praise his own goods.
3) Active concealment of facts amounts to fraud: Instead of making a false representation a person may conceal a material fact which according to him, if stated, would be disadvantageous to him, such concealment of fact amounts to suppression of truth.
4) A promise made without any intention of performing it: A promise includes a representation to the effect that the promisor has the intention of performing it. So if a party makes a promise without having any intention of performing it, he commits fraud e.g., buying goods with no intention of paying for the same.
5) Any other act filled to decieve: Sec. 17 (4) brings within the purview of Sec.17 all such acts which though apparently amount to misrepresentation of fact, may amount to fraud considering the facts of the case.
6) Any act of ommission which the law specifically declares to be fraudulent.
7) Misrepresentation should be addressed to the party misled: The idea behind making misrepresentation should be that the other person must act upon it. Once it is shown that the misrepresentation was addressed to him, it becomes fraud if the person acts upon it though the person making representation may say that he did not intend that the person to whom it was addressed, should act upon it.
8) The representation must induce the contract: The person to whom the representation is made should rely upon the same and should enter into a contract. A false representation is merely irrelevant if it has not induced the party to whom it was made to act upon it by entering into a contract.
9) The party acting on the representation should have been deceived and suffered damage. The aggrieved party can not set aside the contract if he has not sustained damage. If one knows that he is going to be deceived later he cannot complain of being deceived by entering into contract.
Silence – whether fraud ? While active concealment of a material fact is fraud, silence is not fraud except under two circumstances. There is no general duty cast upon a party to a contract to disclose to the other party material facts within his knowledge, but are unknown to the other party. This principle is known as ‘Caveat Emptor’ (let the buyer beware) in contracts of sale of goods. However, under the following two circumstances silence would amount to fraud:
(a) Circumstances of the case cast a duty upon the person keeping silence to speak and (b) silence itself is equivalent to speech.
Duty to speak arises when the parties to a contract are in a fiduciary relationships. Such contracts are known as uberrimae fide contracts, the most common examples being insurance contracts, contracts of suretyship, releases or compromises.
When a person is under no duty to speak, he may become guilty of fraud by non-disclosure, if he voluntarily discloses something and then stops half the way.

4. Misrepresentation:
Before entering into a contract, the parties will make certain statements inducing the contract. Such statements are called representation. A representation is a statement of fact made by one party to the other at the time of entering into contract with an intention of inducing the other party to enter into the contract. If the representation is false or misleading, it is known as misrepresentation. A misrepresentation may be innocent or intentional. An intentional misrepresentation is called fraud and is covered under Section 17. Sec. 18 deals with an innocent misrepresentation. Sec. 18 misrepresentation means and includes (i) the positive assertion in a manner not warranted by the information of the person making it, of that which is not true, though he believed it to be true. (ii) any breach of duty which, without an intent to deceive, gains an advantage to the person committing it, by misleading another to his prejudice. (iii) by 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.
1) Positive assertion of a fact: A person might have received information from an untrustworthy source or hear-say. But he may assert positively that a particular fact concerning the subject matter of the agreement is true. Then he is said to have misrepresented the fact. A false statement need not be made direct to the plaintiff. It is sufficient if it is made to a third party so that the plaintiff becomes aware of it. However, if the misrepresentation has not been embodied in the contract it creates no contractual obligation unless it turns out to be fraudulent.
2) Breach of duty: A person may commit breach of duty without any intention to deceive the other party thus gaining an unfair advantage over the other. When a party to the contract has a duty to disclose all the material facts concerning the subject matter of the contract, but does not do so, he is said to be guilty of misrepresentation. A representation may be true at the time of making it, but later becomes false. This should also be disclosed before the contract is entered into.

3) Causing mistake about the subject matter: If a party to an agreement induces the other to commit mistake as to the nature or quality of the subject matter of the agreement, he is guilty of misrepresentation.
Distinction between fraud and misrepresentation:
1) In misrepresentation the person making the false statement honestly believes it to be true. In fraud, the false statement is made by person who knows that it is false or he does not care to know whether it is true or false.
2) There is no intention to deceive the other party when there is misrepresentation of fact. The very purpose of fraud is to deceive the other party to the contract.
3) Misrepresentation renders the contract voidable at the option of the party whose consent was obtained by misrepresentation. In the case of fraud the contract is voidable. It also gives rise to an independent action in tort for damages.
4) Misrepresentation is not an offence under Indian Penal Code and hence not punishable. Fraud, in certain cases is a punishable offence under Indian Penal Code.
5) Generally, silence is not fraud except where there is a duty to speak or the relation between parties is fiduciary. Under no circumstances can silence be considered as misrepresentation.
6) The party complaining of misrepresentation cann’t avoid the contract if he had the means to discover the truth with ordinary deligance. But in the case of fraud, the party making a false statement cannot say that the other party had the means to discover the truth with ordinary deligance.


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