CHANAKYA NATIONAL LAW UNIVERSITY

Final draft for complete fulfillment of project of Law of Contracts - I

on

“Disclosure of Facts: Effect of Fraud upon Contract”

Submitted to:

Mrs. Sushmita Singh

(Faculty of Law)

Submitted by:

Adya Sharma

Roll number: 211910

1st year, B. A. LL. B. (Hons.)

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 DECLARATION

I hereby declare that the work submitted in B. A. LL. B. (Hons.) Project report entitled
“Disclosure of Facts: Effect of Fraud upon Contract” submitted at Chanakya National Law
University is an authentic record of my work carried out under the supervision of Mrs.
Sushmita Singh. I have not submitted this work elsewhere for any other degree or diploma. I
am fully responsible for the contents of my project work.

SIGNATURE OF CANDIDATE:

NAME OF CANDIDATE: Adya Sharma

ROLL NO.: 211910

CHANAKYA NATIONAL LAW UNIVERSITY

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 ACKNOWLEDGEMENT

In the completion of this project, I would firstly like to thank Mrs. Sushmita Singh, Faculty of
Law of Contracts, whose guidance helped me a lot in structuring my project.

I owe the present accomplishment of my project to my friends, who helped me immensely

through materials throughout the project and without whom, I could not have completed it in the
present way.

I would also like to extend my gratitude to my parents and all those unseen hands who helped
me out at every stage of the project.

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 TABLE OF CONTENTS

DECLARATION ...................................................................................................... ii

ACKNOWLEDGEMENT .......................................................................................iii

TABLE OF CONTENTS ......................................................................................... iv

INTRODUCTION .................................................................................................... 1

SECTION 17 OF THE INDIAN CONTRACT ACT ............................................... 3

Section 17(1) – False statement of facts ................................................................ 3

Section 17(2) – Active concealment...................................................................... 4

Section 17(3) – Promise made without the intention of performing it ................. 5

Section 17(4) - Any act fitted or designed to deceive ........................................... 5

Section 17(5) - Any act or omission which the law declares as fraudulent .......... 5

ESSENTIALS FOR FRAUD .................................................................................... 6

Existence of false representation ........................................................................... 6

Representation must relate to material fact ........................................................... 6

Statement should be meant for the party misled ................................................... 7

Representation must be made before conclusion of contract ................................ 7

Knowledge of its falsity of representation ............................................................ 7

Other party induced to act upon the representation............................................... 8

Reliance on and deception due to representation .................................................. 8

Representation must lead to certain damages ........................................................ 8

MERE SILENCE VIS-À-VIS FRAUD .................................................................... 9

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EXCEPTIONS TO THE PRINCIPLE .................................................................... 11

Duty to speak ....................................................................................................... 11

Fiduciary relationship....................................................................................... 12

Speaking half truth ........................................................................................... 12

Statutory disclosure .......................................................................................... 13

Custom of trade ................................................................................................ 14

Non-disclosure in marriage ................................................................................. 14

When silence is equivalent to speech .................................................................. 14

DAMAGES FOR FRAUD ..................................................................................... 16

Contract not necessarily voidable ........................................................................ 17

CASE STUDIES ..................................................................................................... 18

Non-disclosure in cases of insurance .................................................................. 18

Buyer-Seller Relationship ................................................................................... 20

BIBLIOGRAPHY ................................................................................................... 22

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 INTRODUCTION

Fraud through non-disclosure of facts involves the defendant concealing or omitting certain facts
which were relied upon by plaintiff. It is actually created by a duty to disclose amongst the
parties. If and when there is a duty to disclose certain information, but the party fails to disclose
it, the non-disclosure by Defendant may be just as misleading as making a positive
misrepresentation to the Plaintiff.

The element of fraud in a contract vitiates the contract and such a contract by fraud is voidable at
the option of the aggrieved party. Very often facts are misrepresented, that is, they are declared
in a distorted manner. When facts are intentionally misrepresented, it is known as fraud, which is
dealt with in Sec. 17 of the Indian Contract Act.

However, unintentional or innocent misrepresentation is not fraud. They are simply

misrepresentation falling under Sec. 18 of the Act. Thus, where a false statement is made
intentionally, with the knowledge that it is false, with a view to deceive the other party and
thereby inducing him into entering the contract – it is known as fraud.

But when the person making the false statement believes the statement to be true and does not
intend to deceive the other party to enter into the contract – it is known as misrepresentation.
Thus it can be said that fraud is a willful misrepresentation or a fraudulent misrepresentation and
includes all the acts committed by a person to deceive the other.

This project is aimed at studying fraud under the Indian Law of Contracts. The concept of fraud
plays a role of great importance in the legal system of equity. The concept comes from the basic
right of parties to the contract of having complete and correct knowledge of the facts related to
the subject matter.

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Ultimately, through this project, I have attempted to answer the following questions:

1. What is the basic concept of fraud?

2. What are the necessary conditions for a valid claim of fraud?

3. What is non-disclosure of facts and what effect does it have upon the nature of contracts?

4. What is the position of the Indian law with regard to the same?

5. What is the principle of non-disclosure of facts within the ambit of fraud and how can it
be justified with the help of related case laws?

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 SECTION 17 OF THE INDIAN CONTRACT ACT

Sec. 171 of the Indian Contract Act defines fraud as –

“Fraud” means and includes any of the following acts committed by a party to a contract, or with
his connivance, or by his agents, with intent to deceive another party thereto his agent, or to
induce him to enter into the contract.

(1) the suggestion as to a fact of that which is not by one who does not believe it to be true – is
known as SUGGESTIO FALSI or suggestion of falsehood.

(2) – the active concealment of a fact by one having the knowledge or belief of the fact – is
known as SUPPRESIO VERI or suppression of a fact.

(3) – a promise made without any intention of performing it. It means a promise made falsely
with the intention of inducing the other party to make a reciprocal promise and thereby enter into
a contract.

(4) – any other act fitted or designed to deceive.

(5) – any such act or omission as the law specially declares to be fraudulent.

Section 17(1) – False statement of facts

Under Section 17(1), in order to constitute fraud, it is necessary that there should be a statement
of fact which is not true. Mere expression of opinion is not enough to constitute fraud. For
example , a person, who is aged over 60 years and thus beyond insurable age, deliberately makes
a false statement that his age is 48 years in order to take out an insurance policy, it amounts to
fraud, and the insurer is entitled to avoid the policy.

1
Mulla, Sir Dinshaw Fardunji, The Indian Contract Act, LexisNexis Publications, 2015.

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In Edgington v. Fitzmaurice2, a company was in great financial difficulties and needed funds to
pay some pressing liabilities. The company raised the amount by the issue of debentures. While
raising the loan, the directors stated that the amount was needed by the company for its
development, purchasing assets and completing buildings. It was held that the directors had
committed a fraud.

It is necessary that the false statement must have been made to induce the other party to enter
into the contract.

In Kamal Kant v. Prakash Devi3, the plaintiff, Kamal Kant filed a suit against his mother,
Prakash Devi and some others seeking the cancellation of the trust deed on the ground that his
signature to it was obtained by fraud by falsely telling him that it was the general power of
attorney. The deed, in this case, was attested by the plaintiff‟s father and an advocate. The
plaintiff was an educated man and had all the means to know the contents of the document.
Under these circumstances, it was held that there was no fraud in this case.

If there is a patent defect in an article supplied to a buyer and the buyer has an opportunity to
examine the same, neglects to do so, the supplier cannot be considered guilty of fraud for not
pointing out the defect.

Section 17(2) – Active concealment

When there is an active concealment of a fact by one having knowledge or belief of the fact, that
can also be considered to be equivalent to a statement of fact, that can also be considered to be
equivalent to a statement of fact and amount to fraud. By active concealment of certain facts,
there is an effort to see that the other party is not able to know the truth and he is made to believe
as true which is in fact not so.

Example: A is entitled to succeed to an estate at the death of B. „B‟ dies. C having received
intelligence of B‟s death, prevents the intelligence reaching „A‟ and thus induces A to sell him
his interest in the estate. The sale is voidable at the option of A.

2
Edgington v Fitzmaurice (1885) 29 Ch D 459.
3
Kamal Kant Paliwal vs Smt. Prakash Devi Paliwal And Ors., AIR 1976 Raj 79.

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Section 17(3) – Promise made without the intention of performing it

When a person makes a promise, there is deemed to be an undertaking by him to perform it. If
there is no such intention when the contract is being made, it amounts to fraud. Thus, if a man
takes a loan without any intention to repay, or when he is insolvent, or purchases goods on credit
without any intention to pay for them, there is fraud. If, there is no such bad intention at the time
of making contract, but the promise doesn‟t perform the contract, it doesn‟t amount to fraud.

Section 17(4) - Any act fitted or designed to deceive

Clause (4) provides that „any other act fitted to deceive‟ will also amount to fraud. This clause is
general and is intended to include such cases of fraud which would otherwise not come within
the purview of the earlier three clauses.

Section 17(5) - Any act or omission which the law declares as

fraudulent

According to this section 17(5), fraud also includes any such act or omission as the law specially
declares to be fraudulent. In such cases, the law requires certain duties to be performed, failure
to do which is expressly declared as a fraud.

In Akhtar Jahan Begam v. Hazarilal4, A sold some property to B stating in the sale deed that he
won‟t be liable to B if he suffered any loss owing to A‟s defective title. A had, earlier to this
transaction, sold this property to somebody else, but didn‟t inform B about it. It was held that A
had committed fraud and the contract was voidable at the option of B.

4
Akhtar Jahan Begam v. Hazarilal, AIR 1927 All 693.

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 ESSENTIALS FOR FRAUD

Existence of false representation

The existence of false representation, knowingly or without belief in its truth, is necessary to
constitute liability in the cases of fraud. However, in a few cases, even silence or non-disclosure
constitutes fraud.

In the case of Peek v. Gurney5, the company‟s prospectus did not refer to existence of liabilities,
and gave the impression that company was prosperous. It was held that such non-disclosure
amounted to fraud and investors who had relied upon the prospectus could rescind the allotment.

If any statement made is true on the date when it is made, but later, it becomes untrue before the
contract is actually entered into. It is a duty that it must be corrected as non-correction is fraud
and the contract can be rescinded.

In the case of With v. O’Flanagan6, negotiations for sale of medical practice started in January.
The representation was made that the practice was worth £2,000 a year. The contract concluded
in May, when earnings fell to £5 per week due to the defendant‟s serious illness. It was held that
failure to disclose the fall in earnings is fraud and the contract would be rescinded.

Representation must relate to material fact

The representation, assertion, intention or suggestion under Section 17(1)7 must relate to a
material fact. Any superfluous opinion or exaggerated statement or flourishing descriptions are
not regarded as representation of facts. Similarly, mere opinion, commentary or hearsay is not
representation of fact.

5
Peek v. Gurney (1873) LR 6 HL 377.
6
With v O'Flanagan (1936) Ch 575.
7
Singh, Avtar, Contract & Specific Relief, Eastern Book Company, 2017.

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For example, A while selling rings to B says –” the rings are as good as that of Y.” This is a
mere statement of opinion which cannot be regarded as amounting to fraud.

In the case of Bisset v. Wilkinson8, certain land was sold, whereby the vendor was aware that the
land was required for sheep farming. The vendor told the prospective buyer that, in his opinion,
the land had the carrying capacity of 2000 sheep. However, the land turned out to be unsuitable
for sheep farming. It was held that there was no misrepresentation as the statement was one of
opinion which was honestly held.

Statement should be meant for the party misled

It is necessary that the misleading statement should be meant for the party who is misled. If a
person is purchasing the shares of the company on the basis of any prospectus then he can‟t sue
the company later on because the prospectus is meant for an original allottee of the shares by the
company, not for the person like the present appellant who buys the shares from the original
allottee and therefore, the promoters will not be liable for fraud.

Representation must be made before conclusion of contract

The representation must be made before the conclusion of contract, and it must be made with the
intention of inducing the other party to act upon it.

Knowledge of its falsity of representation

The representation must have been made with the knowledge of its falsity or without belief in its
truth or recklessly not caring for its truth or otherwise. It can be made by the party to the contract
or with his connivance or his agent.

8
Bisset v Wilkinson (1927) AC 177.

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Other party induced to act upon the representation

The other party must have been induced to act upon the representation.

In the case of Smith v. Chadwick9, A bought shares in a company on faith of prospectus which
contained a false statement that B was a director in the company. A had never heard of B, and
therefore, the statement was immaterial to him. It was held that the untrue statement had not
induced A to buy the shares, and hence, A cannot claim damages on ground of fraud.

Reliance on and deception due to representation

The other party must have relied upon the representation and must have been deceived.

In the case of Horsfall v. Thomas10, Thomas bought a cannon from Horsefull. The cannon was
defective, but it was plugged by Horsefull. Thomas did not examine the cannon, and on use, the
cannon burst. It was held that the plug had not deceived Thomas and hence, the contract was not
vitiated by fraud.

Representation must lead to certain damages

The other party, on acting upon the representation, must have suffered some loss. Fraud without
damage does not give rise to action on deceit/cheating.

9
Smith v Chadwick (1884) 9 App Cas 187.
10
Horsfall v Thomas (1862) 1 H&C 90.

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 MERE SILENCE VIS-À-VIS FRAUD

According to Section 1111, in order to constitute fraud there must be a false representation or
assertion of a fact – vide Section 17(1). In other words, there could be suggestio falsi coupled
with the knowledge of its falsity.

Active concealment of a fact has also been considered as amounting to fraud because in that case
there is a positive effort to conceal the truth from the other party. He is made to believe as true
that fact which false. This is what is known as suppresio veri – vide Section 17(2).

At the same time it may be mentioned here that Explanation to Section 17 lays down that mere
silence as to facts does not amount to fraud. It states 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 unless his silence is, in itself, equivalent to speech”

In Keates v. Lord Cadogan12, A let his house to B which he knew was in ruinous condition. He
also knew that the house is going to be occupied by B immediately. A didn‟t disclose the
condition of the house to B. It was held that he had committed no fraud.

Thus a person is required by law to refrain from intentional or active concealments as to facts.
But it does not mean that he is to disclose all material defects of the contract to the other party.
A contracting party is under no compulsion or obligation to point out the defects as to the
subject matter of the contract to the other party.

Illustration - If a person is to sell his goods he is under no obligation to disclose the defects in his
goods, but if he makes an intentional false statement as to the quality of his goods, it will amount
to fraud as under Section 17(1). If he indulges in any Act amounting to active concealment of
facts it will constitute to fraud under Section 17 (2). But if he merely keeps silence it will not
constitute fraud subject to certain exceptions.

11
Mulla, Sir Dinshaw Fardunji, The Indian Contract Act, LexisNexis Publications, 2015.
12
Keates v The Earl of Cadogan (1851) 10 CB 591.

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In case of sale of goods, the rule which is applicable is caveat emptor – or the doctrine of let the
buyer beware. It means that it is the duty of the buyer to be careful while purchasing the goods
as there is no implied condition or warranty as to quality or fitness of goods.

Illustration – A sells by auction to B, a horse which A knows is of unsound mind. A says

nothing of the unsoundness of the horse. A has not committed fraud as mere silence does not
amount to fraud.

“If such consent was caused by misrepresentation or by silence fraudulent within the meaning of
section 17, the contract, nevertheless, is not voidable, if the party whose consent was so caused
had the means of discovering the truth with ordinary diligence”13

In Shri Krishan v. Kurukshetra University14, Shri Krishan, a candidate for the L.L.B. part 1
examination of the university did not complete the prescribed number of lectures which could
make him eligible for appearing in the examination. He, however, filled the examination form
for appearing in the examination without mentioning the fact that his attendance was short. The
university authorities could have discovered the truth by proper scrutiny. The university wanted
to cancel the candidature of the candidate on the ground of fraud. It was held that there was no
fraud as the candidate has just kept silent as to certain facts and further, the university authorities
could have discovered the truth with ordinary diligence.

13
Mulla, Sir Dinshaw Fardunji, The Indian Contract Act, LexisNexis Publications, 2015.
14
Shri Krishnan v. The Kurukshetra University, AIR 1976 SC 376.

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 EXCEPTIONS TO THE PRINCIPLE

Duty to speak

When the circumstances of the case are such that, regard being had to them, it is the duty of the
person keeping silence to speak, keeping silence in such a case amounts to fraud. When there is
a duty to disclose facts, one should do so rather than to remain silent.

There are certain contracts which are contracts of uberrimae fedei meaning contracts of utmost
good faith. In such a type of contract it is supposed that the party in whom good faith is reposed,
would make full disclosure of it and not keep silent.

One instance of contract of uberrimae fedei is contract of insurance . In such a contract, there
may be certain facts which are in full knowledge of the insured or policy holder. He must make
full disclosure of such facts to the insurer or insurance company.

In Life Insurance Corpn. Of India v. Asha Goel15, the apex court explained:

“The contracts of insurance including the contract of life insurance uberrima fides and every fact
of material must be disclosed, otherwise, there is good ground for rescission of the contract. The
duty to disclose material facts continues right up to the conclusion of the contract and also
implies any material alteration in the character of risk which may take place between the
proposal and acceptance. If there are any misstatements or suppression of material facts, the
policy can be called into question. For determination of the question whether the suppression
relates to a fact which is in the exclusive knowledge of the person intending to take the policy
and it could not be ascertained by a reasonable inquiry by a prudent person.”

In the case of V. Srinivasa Pillai v. LIC Of India16, it was held in this case by the Supreme Court
that contract of insurance being one of uberrimae fedei, it is normal to expect in such a contract
utmost good faith on the part of the insured. The insured is expected to answer certain questions
by the insurer and it is his responsibility to give true and faithful answers. If the insured has

15
Life Insurance Corpn. Of India v. Asha Goel (2001) SCC 160.
16
V. Srinivasa Pillai v. LIC Of India, AIR 1977 Mad 381.

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knowledge of certain facts which others cannot ordinarily have, then he should not indulge
himself in suggestio falsi or suppressio veri.

When in the case of contract of insurance, where there exists a duty to disclose , then non-
disclosure of facts that are non-material to and having no bearing on the risk undertaken by the
insured, it does not render the contract voidable.

In Haji Ahmad Yarkhan v. Abdul Gani Khan17- plaintiff spent a sum of money to mark
engagement of his son – later discovered the girl to be epileptic – broke off engagement – sued
other party for compensation for loss suffered due to deliberate suppression of vital fact – Held,
law imposes no general duty on any one to broadcast the blemished of his female relations – not
even to those who are contemplating matrimony with them – no fiduciary relation between
parties - voidable due to mis-representation – no compensation as no fraud.

Fiduciary relationship

Another instance where a duty to disclose facts arises is where the parties to the contract repose
“trust and confidence” in the each other giving rise to a fiduciary relationship.

Illustration - A sells a horse to B, his daughter by auction, who has just come of age. Here the
relationship between the parties would make it the duty of A to disclose that the horse is
unsound. If he does not disclose so, it would amount to fraud.

Speaking half truth

Subject to statutory exceptions under Explanation to Section 17 a person keeping silence but if
he decides to speak, a duty arises to disclose the whole truth. Withholding a part of the
information amounts to fraud.

17
Haji Ahmad Yarkhan v Abdul Gani Khan & Anor, AIR 1937 Nagpur 270.

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Thus, speaking half-truths may also amount to willful misrepresentation as regards to the facts
which have not been disclosed. When there is a duty to disclose all facts, then non-disclosure or
half-disclosure of facts amounts to fraud.

In Junius Construction Corpn. v. Cohen18– plaintiff purchased a tract of land – contract of sale
stated that land subject to the right of Borough (local government in a small town) to open two
streets within the area – actually the Borough had the right to open three streets – Held, though
seller was under no duty to mention the projected streets at all, but having undertaken or
professed to mention them, he could not fairly stop halfway – plaintiff had right to rescission.

In R.C. Thakkar v. Gujarat Housing Board19– false estimates of costs of construction given in a
tender – contractor agreed to some reduction on the belief that the estimate was correct – Held,
representations contained in tender were fraudulent – no defence that plaintiff could have
discovered the true costs by reasonable efforts.

Statutory disclosure

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 of 188220, 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.21

18
Junius Construction Corpn. v. Cohen (1931) 257 NY 393.
19
R C Thakkar v Gujarat Housing Board, AIR 1973 Guj 34.
20
Sinha, Dr. R. K., The Transfer of Property Act, Central Law Agency, 2018.
21
Singh, Avtar, Contract & Specific Relief, Eastern Book Company, 2017.

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Custom of trade

If the usage or custom of trade requires disclosure of certain things or known defects then non-
disclosure would amount to fraud. For example, tobacco/liquor is injurious to health.

Non-disclosure in marriage

Non-disclosure of material facts relating to parties to the marriage has been held to constitute
fraud within the meaning of section 1722 of the Indian Contract Act, 1872.

In Kiran Bala v. Bhaire Prasad Srivastava23, first marriage of the appellant, Kiran Bala, had
been annulled on the ground that she was of unsound mind at the time of that marriage. She was
married to the respondent, Bhaire Prasad Srivastava, the second time. The fact of the annulment
of the first marriage on the ground that she was an idiot was not disclosed to the bridegroom
either by the girl or her parents. It was held that it was not the duty of the bridegroom to find out
these facts, but it was the duty of the girl or her parents not to conceal these facts. Consent of the
bridegroom was held to have been obtained by fraud, and the second marriage of the appellant
with respondent was, therefore, annulled by a decree under section 12(1)(c) of the Hindu
Marriage Act24.

When silence is equivalent to speech

A person who keeps silence knowing fully well his silence is going to be deceptive – is no less
guilty of fraud.

Sometimes, keeping silence as to a certain fact may create an impression as to the existence of
such facts. In such a case, silence amounts to fraud.

22
Kapoor. Dr. S. K., Law of Contracts – I, Central Law Agency, 2007.
23
Kiran Bala v. Bhaire Prasad Srivastava, AIR 1982 All 242.
24
Mulla, Sir Dinshaw Fardunji, Mulla‟s Hindu Law, LexisNexis, 2018.

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Illustration – A says to B ” If you do not deny it I shall accrue that the horse is sound .” B says
nothing. Here B‟s silence is equal to speech that the horse is sound. Later if the horse turns out
to be unsound, B will be guilty of fraud.

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 DAMAGES FOR FRAUD

The contract induced by fraud is voidable at the option of the party deceived, but until the same
is rescinded, it is valid. Hereafter, the defrauded party has the following remedies:

1. He can rescind the contract he must do so within reasonable time. When the contract is
rescinded it becomes void and unenforceable. If in the meanwhile, a third party has acquired
an interest in the subject matter for value and good faith, contract cannot be rescinded.
For example, A purchases land from B by willfully making false representation. A sells the
goods to C before B rescinds the contract. Here, B has lost the right to avoid the contract as a
third party (C) has acquired interest in it.

2. He can affirm the contract, after which the question of rescinding the contract does not arise
and the principle of estoppel will be revoked against him.

3. Since fraud is a tort, the aggrieved party can file a suit to claim damages.

4. He may enforce the principle of restitution against the other party – under Section 6425 of
ICA.

5. He may insist for a decree of specific performance of the contract minus the element of
fraud. The performance of contract can be on the condition that he be put in the position in
which he would have been if the representation had been true.

25
Bangia, R. K., Contract-I, Allahabad Law Agency, 2017.

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Contract not necessarily voidable

When the consent is caused by coercion, fraud or misrepresentation, the contract is voidable at
the option of party whose consent is so caused (Sec.19)26. However, in following cases, the
contract is not voidable –

1. where consent caused by misrepresentation or fraud but that party could discover the
truth by ordinary diligence.
For example, A misrepresented to B to believe that 500 tonnes of indigo was made at A‟s
factory. B inspected the factory, and found that it could produce 400 tonnes only. However,
B buys the factory. It was held that the contract is not voidable on account of
misrepresentation by A.
2. where plaintiff is ignorant of misrepresentation or fraud.
3. where, before the rescission, a third party acquires interest in subject matter of
contract for value or for bona fide.
4. where the party, after becoming aware of his right to rescind, affirms the contract.
For example, in the case of Long Vs. Lloyd27, A induced B to buy lorry and made a false
representation that the lorry was in excellent condition. When B used it and discovered it to
be in a bad shape, B wanted to return it. A agreed to bear half the cost of repairs and B
agreed to it. Later, the lorry broke down completely, and B wanted to rescind the contract. It
was held that acceptance of A‟s offer to bear half the cost of repairs, implies B‟s final
acceptance of the sale, and hence, the contact cannot be rescinded.
5. where rescission is not made within reasonable time
For example, a certain number of shares were allotted on basis of misleading prospectus in
July and the defendant moved to rescind the contract in December. The plaintiff was
precluded from obtaining the relief on the account of unexplained delay of five months.

26
Kapoor. Dr. S. K., Law of Contracts – I, Central Law Agency, 2007.
27
Long v Lloyd (1958) 1 WLR 753.

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 CASE STUDIES

Non-disclosure in cases of insurance

Insurance is a contract between two parties whereby one party agrees to undertake the risk of
another in exchange for consideration known as the premium and promises to pay affixed sum
of money to the other party on happening of some uncertain future event (death) or after the
expiry of a certain period in the case of life insurance or to indemnify the other party on
happening of some uncertain event in the case of general insurance28.

The primary function of insurance is the equitable distribution of the financial losses of insured,
in other words, compensating the few who have lost from the fund built up by the contribution
of all the members. The insured member‟s contribution to the fund is in proportion to the risk
from which he is protected and it is the special function of the insurer to calculate and charge
this contribution or premium. It is also his function to manage the fund up and pay compensation
to the insured who have suffered losses. This benefits both the insurer and the insured. The
insured feels secure that he will be protected from the insurance fund and this gives him freedom
from anxiety. The insurer benefits from investing the fund.

All contracts of insurance are contracts of utmost good faith, so both the insurer and insured are
under a positive duty to make full disclosure of all material facts and not to make any sort of
misrepresentations or mis-descriptions during the negotiations for obtaining the policy. This
duty of utmost good faith applies equally to both the insurer and the insured. The duty to observe
utmost good faith is ensured by requiring the insurer or the proposer to declare that the
statements in the proposal form are true, and that he agrees that they shall be the basis of the
contract and that any incorrect or false statements shall avoid the policy.

The questions in the proposal form shall be so framed so as to get all information which is
material to the insurer to know in order to assess the risk and fix the premium. The insurer
gathers all material facts in prescribed proposal forms which the proposer fills up and signs
adding a declaration that the answers are true. If the assured or the insured fails to make any
28
Ivamy, E. R. Hardy, General Principles of Insurance Law, Butterworth & Co. Publishers Ltd., 1979.

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disclosure, the insurer may avoid the contract. And if any false representation is done by the
insured, then the insurer may repudiate the contract or if he desires, affirm the contract, that is
waive the breach of utmost good faith committed by the assured or the insured. He must make
the choice within a reasonable time after he comes to know about the breach. Otherwise he will
be deemed to have waived the breach. They are expressed by law to be contracts of utmost good
faith29 and both are under a mutual duty to share and disclose all material facts relevant with the
contract.

This utmost good faith is one of the basic and general principles of insurance and is also termed
in Latin as “uberrimae fidei”. This means that each party is entitled to rely on the representations
of the other and each party should have a reasonable expectation that the other is a The insured
must disclose all material facts which are within his actual or presumed knowledge, as the risk
involved and falsification of information by the assured can be valid grounds to vitiate the
contract. This rule was stated clearly by Lord since 1766, in a famous landmark English contract
case Carter v. Boehm30, in which Lord Mansfield established the duty of utmost faith and also
said that insurance is a contract upon speculation. Breach of this duty renders the insurance
contract voidable31.

But it should be noted here that, if he had the means of discovering the truth with ordinary
diligence, the agreement cannot be avoided. Usually these duties are modified by the terms of
the contract. The burden of proving that there has been a breach of those duties lies entirely on
the insurers. Consequently non-disclosure on the part of the insured will entitle the insurer to
avoid the contract ab initio (from the beginning) notwithstanding the absence of any fraudulent
intent. citing in good faith without attempts to conceal or deceive.

29
Beatson & D. Friedman, “Classical to Modern Contract Law, in Good Faith in Contract Law” 3, 4 (1995).
30
Carter v. Boehm (1776) All ER Rep 183.
31
Birds, John, Modern Insurance Law, Sweet & Maxwell Publishers, 2001.

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Buyer-Seller Relationship

In terms of the disclosure problem, sellers as a class have four distinguishing characteristics:

1. Asymmetric Access: The access of sellers and buyers to information is systematicaily and
highly asymmetric, because sellers typically have special access to the characteristics of the
property they are selling. Furthermore, normally the informational advantage of sellers
concerning those characteristics is effectively unerodable by buyers. This results from two
factors. First, even if the buyer can investigate the commodity, the investigation will involve
costs of a magnitude that the seller will not confront32. Second, a buyer's normal
investigation of a highly differentiated commodity, like a used machine or a home, will
seldom produce all the information that the seller has acquired through the history of her
ownership.

2. Acquisition of Information: A seller's private information concerning the characteristics of

the commodity that she is selling is almost invariably acquired without an investment in
search. Instead, the information is usually an adventitious byproduct of ownership. That
would be the case, for example, in Illustration 1, in which the seller knows that the septic
tank on her property is illegal. In general, therefore, requiring disclosure by sellers is in part
a special case of requiring disclosure of adventitiously acquired information.

3. Losses versus Foregone Gains: Another difference between nondisclosure by sellers and by
buyers is that typically nondisclosure by buyers results in forgone gains, while nondisclosure
by sellers results in losses. Cognitive psychology has shown that actors are loss-averse; that
is, the disutility of giving up what one has is greater than the utility of acquiring what one
doesn't have33. To put this differently, an actor perceives the loss of existing endowments as
a greater harm than a failed opportunity to augment his endowments by an equal amount.
Accordingly, perceived losses, such as out-of-pocket costs, are more painful than forgone
gains, such as potential profits. The difference between losses and gains has a systematic
impact in the case of nondisclosure by sellers. A buyer will always disclose private

32
Anthony T. Kronman, Mistake, Disclosure, Information, and the Law of Contracts, 7 J. LEGAL STUD. (1978).
33
Richard H. Thaler, The Winner's Curse: Paradoxes And Anamolies Of Economic Life 63-78 (1992).

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 information that a relevant commodity is worth less than it appears. The position of a seller
is much different. A seller will always disclose private information that a commodity is
worth more than appears, because the information will drive up the price. Therefore, a seller
will only withhold information that the commodity is worth less than appears, because the
information will drive down the price.

4. Incentives to Acquire Information: A nondisclosure rule is most easily justified, and

perhaps only justified, where such a rule provides a significant instrument for the production
of socially useful information. However, an owner normally does not require special
incentives to invest in information about her own property. Ownership already provides a
sufficiently strong incentive for such an investment, because the information will maximize
her utility while she owns the property, and allow her to set the correct price if she sells.
Accordingly, a requirement of disclosure will not significantly diminish the incentive of
sellers to invest in information about their property34.

Given these characteristics, a seller should always be required to disclose material facts
concerning the property that he is selling.

34
Steven Shavell, Acquisition and Disclosure of Information Prior to Sale, 25 RAND J. EcON. 20 (1994).

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 BIBLIOGRAPHY

Books Referred

1. Bangia, R. K., Contract-I, Allahabad Law Agency, 2017.

2. Singh, Avtar, Law of Contract & Specific Relief, Eastern Book Company, 2017.
3. Mulla, Sir Dinshaw Fardunji, The Indian Contract Act, LexisNexis, 2015.
4. Kapoor. Dr. S. K., Law of Contracts – I, Central Law Agency, 2007.

Websites Visited

1. http://en.wikipedia.org/wiki/Contract
2. https://www.linkedin.com/pulse/what-fraud-indian-contract-act-tanay-saraf/
3. http://iosrjournals.org/iosr-jbm/papers/Vol17-issue6/Version-3/D017632936.pdf
4. https://scholarship.law.berkeley.edu/cgi/viewcontent.cgi?article=1354&context=californiala
wreview
5. https://www.legalbites.in/contract-law-notes-fraud-misrepresentation-mistake/
6. https://www.samemerick.com/fraud-by-non-disclosure-in-texas-collections/

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