WHETHER PASSIVE CONCEALMENT CAN BE CONSTITUTED AS A FRAUD?

This article was written by Aishwarya Singh a student of Jindal Global Law School.

The element of fraud usually comes into picture with the agreement of contract, in most of the cases, I came across the words like active concealment and passive concealment i.e. mere silence and wondered as to what is the proper meaning that the Indian Contact Act of 1872 accords to these words. In this response paper, I would seek to explore in the specific manner in which the Indian Contract Act defines ‘passive concealment’ and ‘active concealment’ in accordance to Section 17(1) and 17(2), and how this gives rise to a question that is whether passive concealment can be constituted as a fraud according to the Indian Contract Act, with the hope of responding to some of the difficulties the above question raises for in the Indian contract act of 1872.

The ICA, Section 17 defines fraud as “acts committed by the party to 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.” Contracts are voluntarily formed. Parties are free to set their terms through offer and acceptance. Neither is under an obligation to make an offer or representations associated with the offer. It is for the contracting parties to explore and negotiate before entering into an agreement. In other words, holding back information that would have led the party to reject the contract cannot be constituted as a fraud or misrepresentation. Section 17(1) of the ICA talks about mere silence and section 17(2) states about active concealment. The explanation provision of Section 17 of the ICA “explains mere silence as to facts which are likely to affect the willingness of a person to enter into a contract is not fraud, unless there is change in the circumstances.” According to Lord Herschell in the case of Derry v Peek (1889) 14 AC 337 at p. 374, he stated that: “Fraud is proved when it shows that a false representation has been made – 1. knowingly, or 2. without belief in its truth, or 3. recklessly careless whether it be true or false.” In this case the company’s prospectus contained a representation that the company had been authorized to run trams by steam or mechanical power. The authority to use steam was subject to approval of the Board of Trade but no mention was made of this. The Board refused consent and consequently the company was wound up. The plaintiff having bought some shares sued the directors for fraud. The directors were not held guilty of fraud as they honestly believed that once the Parliament had authorised the use of steam, the consent of the Board will be given in normal course. It implies that a person making a false statement is not guilty of fraud because he honestly believes in its truth. Hence, intentional representation is an essence of fraud.

In the case of Gowrishankar v. Joshi Amba Shankar Family Trust (1996) 3 SCC 310 stated that active concealment is something different from mere passive concealment. Passive concealment means mere silence as to material facts. Silence is no representation. ‘Ordinarily’, silence communicates nothing, and thus cannot be a misrepresentation. For example: In the example of the horse example A sells, by auction a horse to B and A is aware of the fact that the horse is of an unsound mind. A says nothing to B about the horse’s unsoundness. This situation does not constitute to fraud because B did not ask in specific about the horse’s unsoundness, A passively conceals to it but it will not add on as a fraud. In this situation there is no duty on A’s behave to speak. A contracting party is not obliged to disclose each and everything to the other party. If a person has to sell his goods for example: In the toaster example, the sales person is not under any obligation to disclose the defects of the toaster i.e. the toaster gets burned up and it does not work properly. But if the sales person makes a false statement as to the quality of his goods i.e. toaster, it would amount to fraud, but if he merely keeps silence as regards the defect in them, there is no fraud. In the case of sale of goods the buyer has to be aware which means that it is the duty of the buyer to be careful while purchasing the goods, and there is no implied condition or warranty by the seller as to the quality or fitness of the goods for any particular purpose.

False impression is ordinarily conveyed by deliberate misstatements of facts but it can also be done by active concealment of material facts. Mere silence is no fraud, even if results to conceals. In the case of Shri Krishan v. Kurukshetra University AIR 1976 SC 376, the petitioner was a student of law 1^st year. His attendance was short. He did not mention that fact in the admission form. Neither the Head of Department nor the university authority made a proper scrutiny to discover the truth. The university authorities cancelled the candidature of the petitioner on the grounds of fraud. A mere silence is no fraud. Therefore, the cancellation on the ground of fraud was not sustainable. When there is no duty to speak, mere silence will not be fraud even if it amounts to misrepresentation.

In conclusion, silence has to be used not in the literal sense of being quiet but not making any communication. A person can make a representation in writing, orally or by implication. Silence means not making any communication through any of those means. It has been noted that to constitute fraud there should be representation as to certain untrue facts. Active concealment has also been considered to be equivalent to a statement because there is a positive effort to conceal the truth and create untrue impression on the mind of the other. However mere silence as to facts is no fraud that is why passive concealment or mere silence cannot be constituted as a fraud except the circumstances (1) when there is duty to speak, keeping silence is fraud and (2) when silence in itself is equivalent to speech, such silence is fraud.