Contracts are an integral and indispensable part of conducting business. While entering into a new contract, one must be cautious of Contract Fraud. Fraud in general refers to any action done with the intention of deceit. As per section 25 of the Penal Code 1860, an activity is said to be fraudulent if it is done with intent to deceive which would cause or is likely to cause damage or loss to another person or benefit the deceiver. Under the Contract Act 1872, the acts which are committed with the intention to deceive a person or to induce them into entering into a contract, would amount to fraud. For instance, in the case of "Ebrahim Salah Mayat vs Ghulam Hussain", the plaintiff went into a contract with the defendant in regard to a sale of a property. The defendant seller had hidden facts about the title or ownership of the property. Here, the Court held that the defendant had committed contract fraud.

Section 17 of the Contract Act 1872 lists the acts that would amount to fraud. Firstly, making a false statement about a matter that is essential to the contract, knowing that it is untrue, is fraud. If the party making the statement believes the fact to be true, it would not be fraud, but rather misrepresentation. For it to be fraudulent misrepresentation, there must be the intention to deceive. As per the definition of fraud provided by the House of Lords in the UK case "Derry vs Peek 1889', a false statement made without the belief that it is true, is fraud, regardless of whether the fact is true or not.

Secondly, "active concealment" of essential information is fraud. Active concealment does not mean simply choosing to not mention the information. Rather, expressly denying the fact or lying about it or taking steps to hide it, such would be active concealment, hence fraud. Although silence in general is not considered fraud, in certain circumstances, it can be. This includes situations where silence in itself is equivalent to speech. Also, if the party has a duty to disclose all information about the subject matter and they choose to remain silent, it would amount to fraud. This duty exists in specific contracts such as contracts of insurance, marriage engagement, family settlements or share allotment contracts. Along with these, a party is said to have such a duty if the parties are in a "fiduciary relationship", such as the relationship between guardian and ward, or, solicitor and client, or, trustee and beneficiary, or, principal and agent.

If the party entering into a contract has no intention of performing their promise, that would also account for fraud. Any other deceitful actions or unfair methods used to cheat a party to the contract are fraud as well. And lastly, any action or omission that the law specifically declared to be fraudulent is fraud. This includes the provisions of Acts that make disclosure of certain information mandatory.

On the bright side, the law provides remedies for parties dealing with fraud in a contract. For a contract to be valid, there must be "free consent" from all the parties to the contract. Free consent refers to consent of the parties to the terms of the contract without the presence of coercion, undue influence, misrepresentation, fraud or mistake. If the consent is obtained through fraud, the contract becomes "voidable". This means that the contract can become unenforceable and terminable at the choice of the aggrieved party. They can choose to "rescind" the contract, that is, not perform their part of the contract, following Section 35 of the Specific Relief Act 1877, or cancel the contract following section 39. However, this remedy may be unavailable in some situations. If the party agrees to continue with the contract despite being aware of their option to cancel the contract, they cannot choose to rescind it afterwards. Also, they cannot rescind the contract if the aggrieved party cannot give back what they received from the party committing the fraud in line with the contract. And, the remedy may not be available if the rights of third parties are involved. In the case of fraudulent silence, the contract is not voidable if the aggrieved party could have easily discovered the hidden facts if they had been alert or careful.

Following section 19 of the Contract Act 1872, the aggrieved party can also opt for the contract to be performed and ask for "restitution", that is to be restored to a position they would have been if the fraud had not been committed. They can also sue for compensation if the aggrieved party has suffered from any monetary loss due to the fraud.

Contract Fraud can have civil as well as criminal repercussions. The party committing contract fraud may also be charged with the offence of cheating under the provisions of the Penal Code 1860. The offence of cheating has been described in section 415 and the implications of fraud have been given under sections 421 to 424. If the fraud involves the use of false documents, the party committing the fraud may also be liable for the offence of forgery under section 463 of the Penal Code 1860. The punishment for cheating is 1 year imprisonment that can extend up to 7 years with fine. For forgery, the punishment is imprisonment up to 2 years and a fine, and if the forgery was done with the intention of cheating, the imprisonment would extend up to 7 years and a fine.

The writer is a Research Intern at the Research Wing at A.S. & Associates

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.