Explanation to sec. 17 makes it clear that mere silence as to the 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 person keeping silence to speak, or unless silence is equivalent to speech.
1. Mere silence is not fraud:
A person is not bound to disclose the defect of his articles. Example:
A sells by auction to B, a horse which A knows to be unsound. A says nothing to B about the horse's unsoundness. It is not fraud.
2. Silence is fraud if silence is equivalent to speech:
Again where silence is equivalent to speech, silence amounts to fraud. For example, 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 and as such, it is fraud.
Duty or obligation to speak:
In certain contracts, the law requires the parties to make fullest disclosure of material facts. Failure to disclose such facts would make the contract void or voidable as the case may be. Such contracts are called Uberrimae fidei, i.e., contracts requiring utmost good faith. In such contracts, party having any information regarding the subject-matter which is likely to affect the willingness of the other party to enter into transactions, is bound to disclose the information.
Following contracts are included in this category:
1. Contracts of insurance:
In contracts of insurance, the insured is required to disclose all material facts concerning the insurance which are likely to affect the risk and thus the willingness of the insurer. Failure to do so will result in avoidance of the policy. Even if the mistake is innocent, the policy can be avoided.
2. 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.
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.
3. 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. [ London Genera Omnibus Co. Ltd.]
4. Allotment of shares in companies:
To protect public interest, Companies Act requires the directors to make fullest possible disclosure in the prospectus. If the directors do not disclose the specified facts, the agreement to take shares can be avoided.
5. Contract of marriage:
Each party to an agreement for marriage is duty bound to disclose every material fact, otherwise the party is justified in breaking off the engagement. [Hazi Ahmed v. Abdul Gani],
6. Contracts of family settlements:
Full disclosure of all material facts is necessary in case of family settlements.
A knew that there is a treasure in that portion of the house in which he is living. Before partition, he did not disclose this fact to other brothers B and C. B and C can claim the share in the treasure.
Consequences of Fraud :
The party whose consent was obtained by fraud has the following rights:
1. Aggrieved party can avoid the contract.
2. He may also claim damages.
3. He, instead of avoiding the agreement, may insist that the contract shall be performed and may claim the difference or loss due to fraud.