Fraud - Section 17 under Indian Contract Law

Edited By Ritika Jonwal | Updated on Jul 02, 2025 05:47 PM IST

The word "fraud" refers to a broad category of crimes. Fraud is defined as a deliberate deception intended to benefit the offender or violate the victim's rights. The stock, mortgage, and insurance markets are some of the most frequent sites for fraud, but people and companies are typically the intended victims.

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Definition of ‘Fraud’ - Section 17
Elements of Fraud
Misrepresentation and Fraud
Representation under Fraud
Types of Fraud
Consequences of Fraud
Conclusion

Fraud - Section 17 under Indian Contract Law

Fraud is defined as an intentional deception intended to give the perpetrator an unlawful benefit or to deny a victim their right. In the financial, real estate, investment, and insurance sectors, fraud will happen. It may be found in the sales of physical assets like stocks and bonds, as well as intangible assets like real estate like land and personal possessions like artwork and antiques. The topic of Fraud is an important part of legal studies.

Definition of ‘Fraud’ - Section 17

Fraud definition according to several authorities: "Fraud means and includes any of the following acts committed by a party to a contract, or with his connivance, or by his agent1, with intent to deceive another party thereof or his agent, or to induce him to enter into the contract," states section 17 of the Indian Contract Act 1872.

Fraud is defined as any of the following actions carried out intending to deceive or induce another party or his agent to agree by a contracting party, his connivance, or his agent.

The assertion of something false as fact by someone who doesn't think it is true.
The deliberate withholding of information by someone who knows or believes something.
A pledge was made with no plans to follow through on it.
Any other action appropriate for deception.
Any action or inaction that the law expressly designates as fraudulent.

Elements of Fraud

Misrepresentation: It is the act of giving a misleading impression or omitting to reveal important information. Information that might affect the victim's decision-making process is referred to as a material fact. Any information that is important to the transaction or choice might be the subject of the deception.
Intent: To deceive the victim, the individual who is misrepresenting the facts must have wilfully given false information. This implies that choosing to deceive has to be deliberate.
Reliance: The misleading representation had to have been relied upon by the victim. This reliance needs to be reasonable, which means that the victim's circumstances justified her conviction that the statement was true.
Damage: The deception must cause the victim to experience loss or harm. This might involve monetary loss, injury to one's reputation, or other kinds of losses.

Components of Section 17

When Section 17(1) is examined, the following components are revealed:

A proposal about a fact ought to be made.
The stated fact ought not to be accurate.
It should have come from someone who doesn't think the proposition is true.
The recommendation must be made to mislead or persuade the other party to sign the agreement.

Misrepresentation and Fraud

The primary distinction between fraud and misrepresentation is that, while both include a misrepresentation of truth intended to deceive the promisee, in the first situation the person making the proposition does not think it is true, while in the latter case, he believes it is.
This took place during the Jai Janider Parshad vs. Rattan Lal Ahluwalia. According to common law, deception not only makes a contract voidable at the discretion of the person whose assent is gained in this way, but it also gives rise to a claim for damages related to deception.
If it is determined that a decree was acquired via deception, a late application would still be admissible. Even the doctrine of res judicata would not apply in this case since the court lacks inherent authority to give relief.
Fraud is defined as actions, whether verbal or written, that include the other person or authority taking a firm position in retaliation for the former's actions, whether verbal or written.
A legitimate claim for relief from fraud may equally be supported by an innocent misstatement.

Representation under Fraud

A declaration of opinion may occasionally be regarded as a statement of fact, but a representation is a statement of fact, whether it is current or past.
For the representative to be able to stop the agreement, the fraudulent misrepresentation must be substantial, meaning that it should have had an impact on a reasonable man's decision on whether or not to sign the agreement.
A fraudulent certificate was obtained in the Lillykutty v. Scrutiny Committee to gain an unfair advantage. It was decided that every solemn act is tainted by deception.
The courts do not condone fraudulent activity. Any conduct that subverts the intent of the Indian Constitution by the government or by the populace claiming a right or privilege under it shall be considered fraud on the document.

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Types of Fraud

Fraud entails lying, misrepresenting, or using deceit to get unfair or illegal benefits. Fraud may be roughly categorised into two basic types: Constructive fraud and Actual fraud. Below is a thorough description of each:

Actual Fraud

When someone intentionally misleads or deceives another party intending to cause harm or loss to the victim, this is referred to as actual fraud. This kind of fraud is distinguished by intentional acts taken to get an unfair or illegal benefit.

As an illustration:

Financial fraud occurs when an investment advisor purposefully gives a customer misleading information about a stock to profit from the deal.
Identity theft is the theft of a person's personal data to open bank accounts, request loans, or do other fraudulent acts.

Constructive Fraud

Regardless of the intention, constructive fraud happens when a deed, statement, or omission causes injustice or injury, particularly when one party owes another one a duty of confidence. Constructive fraud does not need the intention to deceive, in contrast to real fraud. It frequently occurs when there has been a duty or trust breach.

As an illustration:

Fiduciary Relationships: Even in cases where there is no malicious intent, a trustee may be guilty of constructive fraud if they neglect to disclose a conflict of interest that causes the beneficiaries to suffer a loss.
Professional Negligence: If a professional, such as an accountant or lawyer, breaches their ethical or professional obligations and causes harm to their clients, they may be held accountable for constructive fraud.

Distinguishing Actual Fraud From Constructive Fraud

Intent: Constructive fraud does not need intent to deceive, but actual fraud must. Constructive fraud is primarily concerned with the harm that results from the obligation violation.
Nature of actions: Constructive fraud can arise from carelessness or omissions, but actual fraud entails malicious words or acts.
Legal Repercussions: Fraud of any kind may result in fines, restitution, and, in certain situations, even imprisonment. However, depending on the jurisdiction and particulars of the case, other remedies can apply.

Consequences of Fraud

A contract is voidable under section 19 if permission was gained via deceit. The person who was duped may choose to withdraw the agreement to the degree that it is not carried out, or he may confirm the agreement and demand to be placed in the same situation as he would have been in if the statements were accurate.
In the event of rescission, he may be entitled to damages and must return the advantage he got under section 64.
The amount of damages that can be recovered is the same as what applies to tort deception, meaning that it includes all real losses that result directly from the fraudulent transaction, including subsequent losses, rather than only losses that were reasonably anticipated.
Section 19 also makes a transaction voidable in cases where a document meant to be in favour of one person was transferred to another due to fraud committed by the defendant.

Conclusion

Therefore, it would not constitute fraud to simply remain silent about certain important facts that may influence someone's decision to engage in a contract. However, silence might be considered fraud if it were to be interpreted as speech or if the person had an obligation to tell the other party the truth. Because non-disclosure of pertinent data by one side might cause harm to the other, just silence can lead to fraud. Frauds that are commonplace worldwide can be the result of a serious financial need. The current light punishment for fraud ought to be replaced with a stiff one to give residents a moral compass and prevent them from being influenced by the financial gain associated with it.

Frequently Asked Questions (FAQs)

1. What is fraud?

Fraud is the practice of deceiving another person to get an unlawful benefit or to violate the rights of a victim. One might become subject to fraud in this society by several means, such as wire fraud, credit card fraud, bankruptcy, and security fraud.

2. What does the IPC define as fraud?

"A person is said to do a thing fraudulently if he does that thing with intent to deceive another and, by such deceit, either to cause injury to any person or to induce any person to act to his disadvantage."

3. What constitutes a fraud crime?

According to Section 447, the maximum penalty for fraud is a fine equal to three times the amount of the fraud, not less than the amount involved in the fraud, and a period of imprisonment that cannot be less than six months or more than ten years.

4. In India, what is section 17?

A salary is a type of fixed remuneration that an employee receives for working for a certain amount of time. However, the term "salary" as used in income tax also refers to many additional payments made to employees by their employers.

5. What does the term "fraud" in marital law mean?

According to a ruling in a different case1, "fraud" in the context of section 12(1)(c) refers to either lying about the identity of the other spouse or the type of ceremony being performed.

6. How does fraud affect the validity of a contract?

Fraud makes a contract voidable at the option of the party who was deceived. This means the defrauded party can choose to either continue with the contract or rescind it. If rescinded, the contract becomes void from its inception.

7. Is it necessary for fraud to cause actual damage for it to be actionable?

No, it's not necessary for fraud to cause actual damage to be actionable. The law recognizes that the very act of inducing someone into a contract through fraudulent means is harmful, regardless of whether financial loss occurs.

8. How does fraud differ in contracts uberrimae fidei (utmost good faith)?

In contracts uberrimae fidei, such as insurance contracts, the standard for fraud is higher. Any non-disclosure of material facts, even if not intentional, can be considered fraudulent. This is stricter than the general rule in other contracts.

9. Can third-party fraud affect a contract?

Yes, third-party fraud can affect a contract if one of the contracting parties was aware of or complicit in the fraud. However, if neither party to the contract was aware of the third-party fraud, it generally doesn't affect the contract's validity between them.

10. What remedies are available to a party who has been defrauded?

A defrauded party can: 1) Rescind the contract, 2) Claim damages for any loss suffered, 3) Insist on the contract being performed and be put in the position they would have been if the representation had been true, or 4) Use fraud as a defense if sued for breach of contract.

11. What are the essential elements of fraud under Section 17?

The essential elements of fraud under Section 17 are: 1) A false representation or concealment of facts, 2) Knowledge of falsity, 3) Intent to deceive, 4) Reliance by the other party, and 5) Resulting damage or loss to the deceived party.

12. What is the role of "intention to deceive" in establishing fraud?

Intention to deceive is a crucial element in establishing fraud. It distinguishes fraud from innocent misrepresentation. The party alleging fraud must prove that the other party made the false representation with the deliberate intent to deceive.

13. What is the role of "reliance" in establishing fraud?

Reliance is crucial in establishing fraud. The party claiming fraud must show that they relied on the fraudulent misrepresentation or concealment when deciding to enter the contract. Without reliance, even a false statement doesn't constitute actionable fraud.

14. What is fraud under Section 17 of the Indian Contract Act?

Fraud under Section 17 of the Indian Contract Act refers to any act or omission intended to deceive another party into entering a contract. It involves deliberately misrepresenting facts, actively concealing information, or making promises without the intention to fulfill them.

15. How does the concept of "fraudulent misrepresentation" relate to Section 17?

Fraudulent misrepresentation is a key component of fraud under Section 17. It occurs when a false statement is made knowingly, or without belief in its truth, or recklessly as to its truth. It's one of the primary ways fraud can be committed in contract formation.

16. How does fraud differ from misrepresentation?

Fraud differs from misrepresentation in terms of intent. Fraud involves a deliberate attempt to deceive, while misrepresentation can be innocent or negligent. In fraud, the person making the false statement knows it's untrue, whereas in misrepresentation, they may believe it to be true.

17. What is the difference between fraud and negligent misrepresentation?

Fraud involves intentional deception, while negligent misrepresentation occurs when a party makes a false statement believing it to be true, but without reasonable grounds for that belief. The key difference is in the intent and the level of care taken.

18. What is the difference between fraud and undue influence?

While both fraud and undue influence can make a contract voidable, they differ in nature. Fraud involves deception, while undue influence involves exploiting a position of power or trust to pressure someone into a contract, even without necessarily deceiving them.

19. Can fraud be committed by omission?

Yes, fraud can be committed by omission, particularly when there's a duty to disclose information. This is known as "fraud by silence" and occurs when a party fails to speak up about material facts they have a duty to reveal.

20. Can a party claim fraud if they had the means to discover the truth but failed to investigate?

Generally, a party can't claim fraud if they had reasonable means to discover the truth but failed to investigate. However, this doesn't apply if the other party actively prevented investigation or if there was a fiduciary relationship requiring full disclosure.

21. What is the "reasonable person" standard in determining fraud?

The "reasonable person" standard is used to assess whether a representation would be likely to deceive an ordinary, prudent person. If a statement would mislead a reasonable person, it's more likely to be considered fraudulent, even if the actual victim was unusually gullible.

22. How does the concept of "materiality" apply to fraud?

Materiality in fraud refers to the significance of the misrepresentation or concealment. For fraud to be established, the deception must be material, meaning it should have been a significant factor in inducing the other party to enter into the contract.

23. Can exaggeration in commercial transactions be considered fraud?

Mere commercial exaggeration or "puffing" is generally not considered fraud. However, if the exaggeration crosses into false representation of material facts, it could be deemed fraudulent. The line between puffery and fraud can sometimes be blurry.

24. How does the principle of "uberrima fides" (utmost good faith) apply to fraud cases?

Uberrima fides requires parties to disclose all material facts, even if not asked. This principle is particularly relevant in insurance contracts. In these cases, non-disclosure of material facts can be treated as fraud, even without intent to deceive.

25. How does the principle of "caveat emptor" (let the buyer beware) relate to fraud?

While "caveat emptor" suggests buyers should be cautious, it doesn't protect sellers who commit fraud. The principle doesn't apply where the seller actively conceals defects or makes false representations. Fraud overrides caveat emptor.

26. Can silence constitute fraud?

Yes, silence can constitute fraud in certain circumstances. Section 17 specifies that silence is fraudulent when the silence itself is equivalent to speech, or when there's a duty to speak. This is known as "fraud by silence" or "passive fraud."

27. What is the difference between "suggestion of a fact which is not true" and "active concealment of a fact"?

"Suggestion of a fact which is not true" involves making a false statement, while "active concealment of a fact" involves deliberately hiding or obscuring true information. Both are forms of fraud, but the former is an act of commission, while the latter is an act of omission.

28. How does "promise made without any intention of performing it" qualify as fraud?

A promise made without any intention of performing it qualifies as fraud because it involves deception. The promisor knowingly makes a false commitment to induce the other party into the contract, with no intention of fulfilling that promise.

29. Can a statement of opinion constitute fraud?

Generally, a mere statement of opinion does not constitute fraud. However, if the person giving the opinion doesn't actually hold that opinion or has special knowledge that contradicts the opinion, it could be considered fraudulent.

30. What is the significance of "any other act fitted to deceive" in the definition of fraud?

The phrase "any other act fitted to deceive" in Section 17 is a catch-all provision. It allows the law to encompass various deceptive practices that may not fall under the other specific categories of fraud, ensuring comprehensive protection against fraudulent behavior.

31. What is the statute of limitations for filing a case of fraud in India?

The statute of limitations for filing a case of fraud in India is three years from the date of discovery of the fraud. This is important because fraud often isn't discovered immediately, and the law allows time for the defrauded party to take action.

32. Can a contract be valid if both parties commit fraud?

If both parties to a contract commit fraud against each other, the contract is generally considered void. This is because neither party entered the contract in good faith, and the law doesn't support agreements based on mutual deception.

33. How does the concept of "constructive fraud" differ from actual fraud?

Constructive fraud doesn't require proof of intent to deceive. It occurs when a person's actions, although not deliberately fraudulent, have the same legal consequences as actual fraud. It often arises in fiduciary relationships where there's a duty of utmost good faith.

34. How does fraud in the inducement differ from fraud in the factum?

Fraud in the inducement occurs when a party is tricked into signing a contract they otherwise wouldn't have, but they understand what they're signing. Fraud in the factum happens when a party doesn't understand the nature of what they're signing, like signing a deed thinking it's a loan agreement.

35. How does fraud affect the principle of "consensus ad idem" (meeting of minds)?

Fraud negates consensus ad idem because it prevents a true meeting of minds. When one party is induced by fraud, their apparent consent isn't genuine, as they're agreeing based on false information or concealed facts.

36. What is the significance of "recklessness" in the context of fraud?

Recklessness in fraud refers to making statements without caring whether they're true or false. It's considered equivalent to knowledge of falsity. If a person makes a statement recklessly, without any reasonable grounds for believing it to be true, it can be treated as fraudulent.

37. How does fraud affect the doctrine of privity of contract?

Fraud can sometimes pierce the doctrine of privity of contract. If a third party fraudulently induces someone to enter a contract, the defrauded party might have rights against that third party, even though they're not party to the contract.

38. What is the concept of "fraud on the court" and how does it differ from contractual fraud?

"Fraud on the court" refers to fraud that attempts to interfere with the judicial process itself, like falsifying evidence. It's different from contractual fraud, which occurs between parties. Fraud on the court is a serious offense that can lead to severe penalties beyond contract law remedies.

39. How does the principle of "clean hands" apply in cases of fraud?

The "clean hands" doctrine states that a party seeking equitable relief must come to court with clean hands. In fraud cases, if the party claiming to be defrauded has also engaged in dishonest or fraudulent behavior, they may be denied certain remedies.

40. Can a statement that is literally true be considered fraudulent?

Yes, a literally true statement can be considered fraudulent if it's presented in a way that creates a false impression. This is known as "half-truth" or "literal truth" fraud. The key is whether the statement, though technically true, is misleading in the overall context.

41. How does fraud affect the statute of limitations in contract disputes?

Fraud can extend or "toll" the statute of limitations. The time limit for bringing a claim typically starts from when the fraud was discovered or should have been discovered with reasonable diligence, not from when the contract was made.

42. What is the difference between civil fraud and criminal fraud?

Civil fraud is addressed in contract law and aims to compensate the victim, while criminal fraud is prosecuted by the state and can result in fines or imprisonment. Civil fraud requires a preponderance of evidence, while criminal fraud must be proved beyond reasonable doubt.

43. How does the concept of "fraudulent concealment" differ from simple non-disclosure?

Fraudulent concealment involves active steps to hide information, while simple non-disclosure is passive. Fraudulent concealment might involve destroying evidence or creating false documents, whereas non-disclosure is merely failing to volunteer information.

44. Can a party be held liable for fraud if they genuinely believed their false statement to be true?

Generally, if a party genuinely believed their false statement to be true, it wouldn't be considered fraud. However, if they made the statement recklessly, without any reasonable grounds for believing it to be true, it could still be deemed fraudulent.

45. How does the principle of "estoppel" apply in cases of fraud?

Estoppel can prevent a party from denying the truth of a statement they previously made. In fraud cases, if a party has made representations that induced the other to act, they may be estopped from later claiming these representations were false, even if they were.

46. What is the role of "materiality" in determining whether a misrepresentation is fraudulent?

Materiality is crucial in determining fraud. A misrepresentation is material if it would likely influence a reasonable person's decision to enter into the contract. Trivial or inconsequential misrepresentations, even if intentional, generally don't constitute actionable fraud.

47. How does fraud affect the principle of "pacta sunt servanda" (agreements must be kept)?

Fraud undermines the principle of pacta sunt servanda. While contracts should generally be honored, fraud provides an exception. A contract induced by fraud is voidable, allowing the defrauded party to rescind it, thus overriding the normal expectation that agreements must be kept.

48. Can silence constitute fraud in fiduciary relationships?

Yes, silence is more likely to constitute fraud in fiduciary relationships. In these relationships, there's a higher duty of disclosure, and failing to disclose material information can be considered fraudulent, even without any active misrepresentation.

49. How does the concept of "fraudulent inducement" relate to Section 17?

Fraudulent inducement falls under Section 17. It occurs when a party is tricked into entering a contract through false representations or concealments. The key is that the fraud relates to the inducement to contract, not necessarily the terms of the contract itself.

50. What is the significance of "knowledge of falsity" in establishing fraud?

Knowledge of falsity is crucial in distinguishing fraud from innocent misrepresentation. For a statement to be fraudulent, the person making it must know it's false, believe it to be false, or make it recklessly without caring whether it's true or false.

51. How does fraud affect the principle of "caveat subscriptor" (let the signer beware)?

While caveat subscriptor suggests that a person is bound by what they sign, fraud provides an exception. If a party was induced to sign a document through fraud, they may be able to avoid the contract, overriding the normal expectation that signers are bound by their signatures.

52. Can a party claim fraud if they relied on a misrepresentation that a reasonable person would not have believed?

Generally, a party cannot claim fraud if they relied on a misrepresentation that a reasonable person would not have believed. The law expects people to exercise ordinary diligence and common sense. However, if the deceiving party exploited a known vulnerability, it might still be considered fraud.

53. How does the concept of "fraudulent misrepresentation by conduct" differ from verbal misrepresentation?

Fraudulent misrepresentation by conduct involves deceptive actions rather than words. This could include presenting false samples, using misleading demonstrations, or creating a false appearance of circumstances. While the method differs, the legal consequences are similar to verbal misrepresentation.

54. What is the relationship between fraud and the principle of "good faith" in contract law?

Fraud is fundamentally opposed to the principle of good faith in contract law. Good faith requires honesty and fair dealing, while fraud involves deliberate deception. The presence of fraud indicates a clear breach of the good faith principle that underlies contract law.

55. How does the "fraud exception" apply to the parol evidence rule?

The fraud exception to the parol evidence rule allows parties to introduce external evidence to prove that a contract was induced by fraud, even if the contract appears complete on its face. This exception exists because fraud undermines the very foundation of the agreement.