National Law Institute University

Bhopal (M.P)

Law of Contract – I

Project on the Topic

“Silence Amounting To Fraud”

Second Trimester

Submitted By Submitted To

Adhir Lot Ms. Neha Sharma

2018B.A.LL.B43

Section – ‘A’
Page 1 of 17
 CERTIFICATE

This is to certify that the research paper on silence amounting to fraud has been prepared and
submitted by Adhir lot, who is currently pursuing his B.A.LL.B.(Hons.) at National Law
Institute University, Bhopal in fulfilment of Law of Contracts - I course. It is also certified
this is original research report and this paper has not been submitted to any other university,
nor published in any journal date –

Signature of the student …………………………….

Signature of the research supervisor …………………………..

Page 2 of 17
 ACKNOWLEDGMENT

I have been taught the subject of Law of Contracts by our respected lecturer, Ms. Neha
Sharma who helped me all through in the accomplishment of this project. My sincere thanks
to the Respected Lecturer, who helped me in identifying the research gaps in the topic under
study and its related resources, which led me to present it in a more logical manner. She not
only provided me a platform to compile but also guided me at all levels. I also would like to
thank the staff members of the library and the computer section for their cooperation in
making available the books and accessing the internet even during their free time. I hope that
the project in its present form will enable the future researchers to conduct further research on
the chosen topic, and also aid the existing scholars in the form of a reference.

Page 3 of 17
 CONTENTS

INTRODUCTION....................................................................................................................5
ESSENTIAL OF FRAUD …………………………………………………………………...6

MERE SILENCE IS NO FRAUD ..........................................................................................7

CONTRACT OF UTMOST GOOD FAITH .........................................................................8
DISCLOSURE OF CHANGE IN STATEMENT............................................................................. 9
DISCLOSURE OF HALF TRUTH ......................................................................................11
DISCLOSURE REQUIRED BY STATUTE .......................................................................12
SILENCE IS EQUIVALENT TO SPEECH .......................................................................14
REVIEW OF LITERATURE ...............................................................................................15
CONCLUSION ......................................................................................................................16
BIBLIOGRAPHY ..................................................................................................................17

Page 4 of 17
 INTRODUCTION

The term ‘Fraud’ is defined under section 17 of Indian Contracts Act, 1872.The concept of
the fraud says, that when one party deliberately or wilfully compels the other party with an
intention to deceive the other party that is known as the fraud. If one party knows about the
thing that a certain statement or certain thing is not true and that party is deliberately with
intention or with wilfully entering into the contract with the another party, it is said that that
party has done a fraud with the another party, provided that party enters in the contract with
this particular notion.
According to Sec.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.
As a rule mere silence is not fraud because there is no duty cast by law on a party to a
contract to make a disclosure to the other party, of material facts within his knowledge. The
Explanation to Section 17 deals with cases as to when ‘silence is fraudulent’ or what is
sometimes called ‘constructive fraud.’
The explanation declares that “mere silence as to facts likely to affect the willingness of a
person to enter into a contract is not fraud, unless the circumstances of the case are such that,
regard being had to them, it is the duty of the person keeping silence to speak, or silence is, in
itself, equivalent to speech.”

Page 5 of 17
Essentials of Fraud
Analyzing the definition of fraud under Section 17 , we get the following essential elements
of fraud –

• Party to the contract –

The Act of fraud must be done –

• By the party to the contract himself

• With his connivance

• Or by his agent

• There must be a false representation or assertion – Section 17

(1) To constitute fraud there must be conjugation of 2 things –

• A representation or assertion of a fact which is not true and

• The person making such representation or assertion of fact does not believe it to be
true.

This is what is meant by suggestio falsi or suggestion of falsehood coupled with the
knowledge of its falsity.

Illustration -

B having discovered a vein of iron ore in the estate of A adopts means to conceal and is
successful to conceal the existence of the ore from A. through A’s ignorance he buys
that estate at an under value.

It is a voidable contract under Section 2(1) of the Act. So A may cancel the contract because
it is a fraud committed against him by B. the fraud is a fraud of concealment of fact.

Page 6 of 17
 MERE SILENCE IS NO FRAUD

Mere silence as to fact likely to affect the willingness of a person to enter into a contract is
not a fraud. Unless the circumstances of the case are such that, regard being had to, it is the
duty of the person keeping silence to speak or unless his silence is in itself equivalent to
speech.

A contracting party is not obliged to disclose each and everything to the other party.

KEATES V. LORD CADOGAN

In this case A let his house to B which is knew was in ruinous condition. He also knew that
the house is going to be occupied by B immediately. A did not disclose the condition of
house to B. it was held that he had committed no fraud.

A contracting party is under no obligation to disclose the whole truth to the other party or to
give him the whole information in his 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.
Silence is not fraud unless:

1. There is duty to speak.

▪
Contract of utmost good faith.
▪
Disclosure of change in statement.
▪
Disclosure of half truth.
▪
Disclosure required by statute.

2. Silence is equivalent to speech.

Explanation – Mere silence as to facts likely to affect the willingness of a person to enter
into a contract is not fraud, unless the circumstances of the case are such that, regard being
had to them, it is the duty of the person keeping silence to speak, or unless his silence is, in
itself, equivalent to speech.

Illustrations

Page 7 of 17
 1. A sells, by auction, to B, a horse which A knows to be unsound. A says
nothing to about the horse's unsoundness. This is not fraud in A.
2. 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.

3. 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.
4. 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.
CONTRACT OF UTMOST GOOD FAITH
A legal agreement requiring the highest standard good faith. "Uberrimae fidei" is Latin for
"utmost good faith." Insurance contracts are the most common type of uberrimae fidei
contract. Because the insurance company agrees to share the risk of loss with the
policyholder, it is imperative that the policyholder act in good faith by fully disclosing all
information that affects the insurance company's level of risk.
It is a fundamental principle of law that utmost good faith must be observed by the
contracting parties. Good faith forbids either party from concealing (non-disclosure) what
he privately knows, to draw the other into a bargain, from his ignorance of that fact and his
believing the contrary. Just as the insured has a duty to disclose, similarly, it is the duty of
the insurers and their agents to disclose all material facts within their knowledge, since
obligation of good faith applies to them equally with the assured. The duty of good faith is
of a continuing nature. After the completion of the contract, no material alteration can be
made in its terms except by mutual consent. The materiality of a fact is judged by the
circumstances existing at the time when the contract is concluded.1
It is the fundamental principle of law that utmost good faith must be observed by the
contracting parties and good faith forbids either party from non-disclosure of the facts
which the parties know. The insured has a duty to disclose and similarly it is the duty of the
insurance company and its agents to disclose all material facts in their knowledge since the
obligation of good faith applies to both equally.2

1
United India Insurance Company Ltd. v. M.K.J. Corporation
2
Modern Insulators Ltd. v. Oriental Insurance Co. Ltd.

Page 8 of 17
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. There is a contract of utmost good faith
in case of family relations also.
CASE ANALYSIS

Haji Ahmad Yarkhan v. Abdul Gani khan

The plaintiff spent a sum of money to mark the engagement of his son. He then discover that
the girl suffered from epileptic fits and so broke off the engagement. He sued the other party
to recover from the compensation for the loss which he had suffered on account of their
deliberate suppression of a vital fact which amounted to fraud.

The court relied upon the decision of the house of lords in nocton v lord ashburton 3 where it
was pointed out that a mere passive non – disclosure of the truth, however deceptive in fact,
does not amount to fraud , unless there is a duty of speak. Reffering to the facts the court said
that the law imposes no general duty on anyone to broadcast the blemishes of his female
relations, not even to those who are contemplating matrimony with them . there was no
fiduciary relation between parties . the engagement was, however, held to be voidable by
reason of the misrepresentation , but the plaintiff was not entitled to recover any
compensation under section 75 of the contract act.

DISCLOSURE OF CHANGE IN STATEMENT

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 other party. In such
circumstances, it is duty of person who made the representation to communicate the change
of circumstances. In an English case for example :
A medical practitioner represented to the plaintiff that “his practice was worth $2000 a year”
the representation was true. But five months later when the plaintiff actually bought the
practice. It had considerably gone down on account of the defendant’s serious illness.
It was held that the change of circumstances ought to have been communicated. Similarly, in
case before the madras high court4

Page 9 of 17
 T.S. Rajagopala Iyer v. The South Indian Rubber Works3

FACTS: Plaintiff had applied for shares in. the respondent company on the basis of the
prospectus issued on 20th January, 1937, containing, inter alia, the names of several
persons as directors and specifying the sum of Rs. 40,000 as the minimum sum upon which
the company would proceed to allotment of the shares. Before the allotment took place,
there were changes in the directorate, on which the plaintiff appellant relied as one ground
on which he. could withdraw his offer and decline allotment. This important change was
made on 9th May, 1937, and two days later an allotment letter was sent, to the plaintiff
appellant. Some correspondence ensued and eventually on 1st June the plaintiff appellant
repudiated his offer to take the shares on the ground of the reduction of the minimum
subscription. In his letter of repudiation he made no mention of the change in the
directorate. He eventually brought this suit to recover the money paid with his application
for shares, after the respondent company had refused to make any refund.
HELD: If an application for shares is made on the faith of a statement which is true when
made but which is not true when the shares are allotted, the applicant may refuse to take
them. There has been a material change in the prospectus since he made his offer and he is
then entitled to decide that with this material change the prospectus of the company are not
sufficiently attractive to warrant him in subscribing his money. That was sufficient to
entitle an allottee to avoid the allotment.

3
T.S Rajagopal Iyer v. South Indian Rubber works LTD, (1942)2 MLJ 228.

Page 10 of 17
 DISCLOSURE OF HALF TRUTH

Even when a person is under no duty to disclose a fact, he may become guilty of fraud by non
– disclosure if he voluntarily discloses something and then stops half the way . a person may
keep his silence, but if he speaks, a duty arises to disclose the whole truth . “everybody
knows that sometimes half a truth is no better than a downright falsehood.

In a US case4, for example, the plaintiff purchases a tract of land. The contract of sale stated
that the land was subject to a right of the borough to open two streets within the area . But as
matter of fact the borough had the right to open the streets.

Holding that the plaintiff had the right of recession, Cordozo CJ said “ we do not say that
seller was under a duty to mention that 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 fairly stop halfway”

Gluckstein vs. Barnes

FACTS: Promoters of a company had acquired a property intending its resale through the
sale of shares in the company. In doing so the original directors made a substantial profit
which they did not disclose (though it was discoverable). The company became insolvent
and investors sought repayment of the hidden profit. The promoters purchased property for
£140,000 and sold it to the company for £180,000. Their profit of £40,000 was disclosed in
a prospectus inviting the public to buy shares but it did not disclose a further profit of
£20,000, made when they purchased charges on the property at a discount which were later
repaid.
Held: The action succeeded. As promoters they were under a duty to make explicit
declarations of the profits already made. The central fact in the history is, that while the
object of the syndicate was to make profit out of the resale, it was a essential part of the
enterprise, as originally designed and as actually carried out, that the same individuals who
sold as syndicate should buy as directors. This was provided by the third head of the
agreement which set up to syndicate, and it has a far-reaching effect at all stages of the

4
Junius construction corpn v cohen (1931) 257 NY 393

Page 11 of 17
argument. A party who discloses only half a story without disclosing the rest can be telling
‘no better than a downright falsehood.’

DISCLOSURE REQUIRED BY STATUTE

In some cases the disclosure is required by a statute. In such a case also there arises a duty to
speak.For instance, under the TP Act 1882, under Section 55 , the seller of immovable
property is bound to disclose to the buyer all material latent defects in the property. Not doing
so will amount to fraud.Section 150 of the ICA envisages a duty of the bailor to disclose
faults in goods bailed failing which he may be held liable for damages.
Contract of immovable property:

Under Sec. 55(i) (a) of the Transfer of Property Act, 1882, the seller is under an obligation
to disclose to the buyer any material defect in the property or in the seller's title of which the
seller is aware and the buyer is not aware, nor he (Buyer) could know with ordinary care.

Example:

A knows that there is a crack in the foundation of his house. He sells this house to B but
does not disclose this defect to B. It is fraud.

B can avoid the sale when he comes to know of the defect.

Lallubhai Rupchand vs. Mohanlal Sakarchand

FACTS: The plaintiff sent the defendant a notice calling upon him to complete the sale.
Defendant replied demanding inspection of the title-deeds. Inspection was given in the office
of defendant's pleader. The defendant then wrote a letter, exhibit 10, taking various
objections. He pointed out that, at the instance of the Municipality, Government had decided
to acquire the suit property along with others in the same locality under the Land Acquisition
Act and that a notification to that effect had been published in the Bombay Government
Gazette in August, 1912. Next, it was stated that plaintiff had purchased the house from one
Bai Hirakor in 1925 under a deed, exhibit 25, that under the will of her husband this Bai
Hirakor had only a widow's estate and that the will was unsigned and unattested. Thirdly, it

Page 12 of 17
was pointed out that there had been litigation between the plaintiff and his neighbour
Champaklal in 1925 and a consent decree had been passed imposing restrictive conditions as
to the user of the plaintiff's property, that is to say, the decree bound the plaintiff not to build
on part of the open land at the back of the house and not to close certain windows in
Champaklal's house. As to one of these windows the decree provided that it was not to be
closed at all; as to the other it was to remain open until such time as the plaintiff desired to
build up to that height. In view of these defects, or alleged defects, in the title the defendant
refused to complete and demanded return of his deposit.

HELD: The defect to be material must be of such a nature that it might be reasonably
supposed that if the buyer had been aware of it he might not have entered into the contract
at all, for he would be getting something different from what he contracted to buy. The
question, whether a defect is patent or latent, presents more difficulty because the
expression "ordinary care" is somewhat indefinite. A defect which can be seen on
inspection is obviously not latent, for instance, the ruinous condition of a house, and it may
be said generally that a defect should be regarded as capable of discovery with ordinary
care if there is anything to put the buyer on inquiry which would disclose the defect, for
instance a footpath across a meadow. The liability of this property to be compulsorily
acquired may fairly be said to amount to a material defect. The buyer is entitled to say that
he wants a house and not a right to compensation,

Page 13 of 17
 SILENCE IS EQUIVALENT TO SPEECH

Mere silence as to facts likely to affect the willingness of a person to enter into a
contract is not fraud, unless the circumstances of the case are such that, regard being
had to them, it is the duty of the person keeping silence to speak2, or unless his
silence, is, in itself, equivalent to speech. Explanation clearly mentions this exception.
A person, who keeps silence knowing that his silence is going to be deceptive, is no less
guilty of fraud.

Srikrishnan vs. Kurukshetra University

An examinee didn’t mention shortage of attendance in his examination form. University

cancelled his examination on the ground of shortage of attendance. The court held that
examinee was silent as to his attendance and university administration had means to obtain
information about his attendance. It could have known by ordinary diligence Kurukshetra
University was held liable.

Page 14 of 17
 REVIEW OF LITERATURE

1. Whether mere Silence could lead to Fraud as per Indian

Contract Act?5
◼
SUDHIR SINGH

Contracts of surety ship:

Strictly speaking, contracts of guarantee are not contracts of good faith. Even then the
creditor should disclose any known facts which are likely to affect the surety's
willingness to guarantee the amount. For example, failure of an employer to disclose to
the safety the misconduct of a servant for whose honesty the latter had given a
continuing guarantee is sufficient to discharge the surety from his obligation to make
good the loss due to default of the servant. The surety is discharged even though the non-
disclosure may not be fraudulent.

2. Silence in customary contract

◼
SHEENAM SEHGAL

In cases of customary contract there is a duty to speak by the party for any material
fact as to which may affect the offeree’s acceptance. In cases of marriages failure to
mention the insanity of one of the party may lead the marriage void and it comes
within the ambit of fraud.

5
http://www.preservearticles.com/2012012621498

Page 15 of 17
 CONCLUSION

Active concealment of fact is fraud as defined in section 17(2) of the Indian

Contract Act, 1872. However passive concealment is not fraud unless there is duty
to speak or the silence is itself equivalent to speech. As a rule mere silence is not
fraud because there is no duty cast by law on a party to a contract to make a
disclosure to the other party, of material facts within his knowledge. The
Explanation to Section 17 deals with cases as to when ‘silence is fraudulent’ or
what is sometimes called ‘constructive fraud.

Page 16 of 17
 BIBLIOGRAPHY

i) WEBSITES:

• www.manupatra.com

• www.indiakanoon.org

• www.lexology.com

• e-lawresources.co.uk

ii) BOOKS:

• Contract and Specific Relief by Avtar Singh

Page 17 of 17