YOU FRAUD!!!

Picture Credit: ENR

There is a current case of fraud, Published by Mary B. Powers and Debra K. Rubin on January 24th, 2021, in Engineering New Record. Two executives of a woman-owned air quality consulting firm that held contracts with the Port of Los Angeles filed suit Jan. 20 against the port and city for breach of contract and retaliation after reporting sexual harassment and instances of alleged contracting fraud.

Before you call someone as YOU FRAUD!!!

know what is it.

From my understanding, fraud makes a contract void. This is because, there was an intentionally false representation of a fact, active concealment of a fact, a fake promise without the intention for performing it, or any other intention to deceive the contracting property and any such act or omission as the law specially declares to be fraudulent Silence also can amount to fraud when the deceiving party tells only half the truth. However, in a matter of silence, it does not amount to fraud if another contracting party has the chance to find the truth.  For an illustration of  real-life friendly situations; 

a) The car agent selling the second-hand car by lying to the contracting party that the car has only been driven for 1000km whereas the car has driven for almost 10000km.

b) A very small catering service promises to cook for a mega-event just to gain the deposit. 

c) A company does not disclose the change of board members or only tells half of the newly elected board members to the shareholders before the buying of shares. 

For a further detailed legal explanation read below; 

Fraud occurs when a person knows he makes a false statement to induce another person to enter a contract. Contract Act 1950 specified a clear definition of fraud under Section 17; “Fraud” 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. The similarity between fraud (section 17) and misrepresentation (section 18) is both have false representations of fact. The difference is on the state of mind of the statement maker under section 17 where he intends to deceive or did not believe the false representation of fact. On the other hand, the statement maker under section 18 believes it to be true.

This section outlined 5 DIFFERENT FRAUDULENT ACTS:

(a) the suggestion, as to fact, of what which is not true by one who does not believe it to be true;

(b) the active concealment of a fact by one having knowledge of belief of the fact;

(c) a promise made without any intention of performing it;

(d) any other act fitted to deceive,

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

The general rule is that mere silence or non-disclosure is not considered fraud. However, explanation to section 17 provides exceptions where silence or non-disclosure may amount to fraud. Firstly, when a person has a duty to speak and disclose all relevant facts but he failed to do so. In Haji Ahmad Yarkan v Abdul Gani Khan & Anor, the plaintiff cut off his son's engagement when he discovered the girl was sick. The plaintiff claimed compensation for the money spent on the event. The court held there was a duty to disclose the girl's illness. Secondly, when the silence is equivalent to speech. Let's see illustration (c) of section 17; 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.

As for the standard of proof - If the fraud is based on a criminal offense, the court will apply the criminal burden of proof beyond a reasonable doubt. Even if there is 0.01% doubt, the court must acquit the accused. If the fraud is based on civil offense, the court will apply the civil burden of proof on the balance of the probabilities.

free consent is a must to constitute a valid contract. The presence of fraud may cause the contract to be voidable according to section 19. In the meantime, there is also an exception under the same provision where the contract is still valid even though there were fraud and misrepresentation. It must be noted that this exception is only applicable for silent fraud cases. Firstly, fraud did not affect the misled party's consent. A person's knowledge about fraud or misrepresentation is unnecessary even though it exists in the contract because his decision is not affected by it anyway. Therefore, whether the misled party know or did not know the false representation, his decision to enter the contract is not influenced by the fraud.

Secondly, the misrepresentation or fraud by silence could have been discovered by the misled party had he exercised ordinary diligence before entering into the contract. As consequence, a person cannot claim to set aside the contract because he has the means of discovering the truth with ordinary diligence. This commensurate with caveat emptor (let the buyer beware).

Nevertheless, the exception to section 19 does not apply to active fraud because the misled party does not have any duty to exercise ordinary diligence. It only applies to silence fraud and misrepresentation proportionate to section 18 Contract Act 1950.

Hence always be aware of contracting parties, if you even have the slightest doubt of the opponent part is finger-crossing while contracting, don't make a contract then.