Is Silence amount to Fraud?

The Explanation to Section 17 deals with cases as to when ‘silence is fraudulent’ or what is sometimes called ‘constructive fraud,’ The explanation declares that “mere silence as to facts likely to affect the willingness of a person to enter into a contract is not fraud, unless

(i) 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

(ii) Silence is, in itself, equivalent to speech.” It therefore follows that

1. As a rule mere silence is not fraud because there is no duty cast by law on a party to a contract to make a disclosure to the other party, of material facts within his knowledge.

Illustration A and B, being traders, enter upon a contract. A has private information of a change in prices which would affect B’s willingness to proceed with the contract. A is not bound to inform B [Illustration (d) to Section 17].

2. Silence is fraudulent, if the circumstances of the case are such that it is the duty of the person keeping silence to speak ‘. In other words, silence is fraudulent in contract of ‘utmost good faith’ i.e contracts ‘unberrimae fides’. These are contracts in which the law imposes a duty of abundant disclosure on one of the parties thereto, due to peculiar relationship of the parties or due to the fact that one of the parties has peculiar means of knowledge which are not accessible to the other. The following contract come within the class of ‘unberrimae fides’ contracts;

(a) Fiduciary relationship. When the parties stand in a fiduciary rela-tion to each other, the person in whom confidence is reposed is under a duty to act with utmost good faith and to make a full disclosure of all material facts concerning the transaction known to him. Examples of a fiduciary relationship include those of principal and agent, solicitor and client, guardian and ward, and trustee and beneficiary.


(i) Where a broker who was employed to buy shares for the client, sold his own shares to the client, without disclosing this fact to him and without obtaining his consent therefore, it was held that the sale can be avoided by the client (Regier vs Campbell-Stuart).

(ii) Where solicitor purchased certain property from his client nominally for his brother, but really for himself; it was held that the sale can be avoided by the client, even if the transaction was perfectly proper one (Macpherson vs Watt).

(b) Contract of insurance-In contracts of marine, fire and life insurance, the insurer contracts on the basis that all material facts have been communicated to him; and it is an implied condition of the contract that full disclosure shall be made, and that if there has been non: disclosure he shall be entitled to avoid the contract. The assured, therefore must disclose to the insurer all material facts concerning the risk to be undertaken e.g., disease etc., in case of life insurance. A concealment or misstatement of a material fact will render the contract void (Ratan Lal vs Metropolitan Co.).

(c) Contract of marriage engagement . Every material fact must be disclosed by to parties to a contract of marriage otherwise the other party is justified in breaking off the engagement (Haji Ahmed vs Abdul Ganj).

(d) Contracts of family settlements. Contracts of family settlements and arrangements also require full disclosure of all material facts within the knowledge of the parties to such contracts. Such a contract is not binding if either party has been misled by the concealment of material facts.

(e) Share allotment contract: Promoters and directors, who issue the ‘prospectus’ of a company to invite the public to subscribe for shares and debentures, possess information which is not available to general public and as such they are required to. disclose all information regarding the’ company with strict and scrupulous accuracy.

3. Silence is fraudulent where the circumstances are such that “silence is, in itself, equivalent to speech.” “Where, for example, B says to A-”If you do not deny it, I shall assume hat the horse is sound.” A says nothing. Hence A’s silence is equivalent to speech. If the horse is unsound A’s silence is fraudulent.
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