CONSTRUCTIVE FRAUD: AN ANALYSIS

Meaning of Constructive Fraud

Constructive Fraud (“CF“) is a legal fiction used in the law to describe a situation where a person or entity gained an unfair advantage over another by deceitful, or unfair, methods. Intent does not need to be shown[1] as in the case of actual fraud[2].

Under contract law, a defendant can be liable to a plaintiff for constructive fraud if there was: (1) a false misrepresentation; (2) in reference to a material fact; (3) for the purpose of inducing the other party to rely on such representation; (4) on which the other party did justifiably rely; (5) which resulted in damages or injury; and (6) a fiduciary relationship between the parties[3].

To methodically plan to deceive someone for the purposes to make money for products or services. The handmaiden to constructive fraud is “baiting,” the customer to buy. CF always involves deception and a lack of intent to provide what is actually specified in a contract or advertisement. There is an important distinction between the legal definition of constructive fraud and the moral definition of constructive fraud[4]. In the legal sense intent must be proven otherwise it is considered an unintentional concealment of a material fact. In the moral sense a person is judged in more general terms with an emphasis on patterns of deception or an ongoing history of skirting the law. Judgment comes from what is called constructive knowledge: “If by prudent behaviour one should have known a fact they are deemed having knowledge of that fact.” A bank employee who deals with contracts has constructive knowledge that contracts are signed by a pen. The fact of having worked so long in the back would in some form acculturate the employee to the knowledge that contracts are signed by a pen and not a pencil[5].

Explanation with Examples

A Misleading advertisement is a form of constructive fraud. There is no intention to offer the product or service for the price stated. The ad might offer Internet and phone service for $19.95 each but when the customers signs up of the service—and signs a two year contract—they find out it is actually $29.95 for each the first year. The second year the price goes up to $39.95 each[6]. Here, the service provider has inserted in very small letters the words “with qualifying internet package,” in the advertisement. Leading a client to false expectations is common where there is constructive fraud. Here the company offers the “symbol of good service or a good product” and not delivering on the “substance” of good service or a good product. The words “constructive fraud” are being used here as a moral term and not a legal term. In law you cannot determine the planning of a fraud until there is a conviction. In a moral and ethical evaluation you can[7].

Indian Contract Act, 1872 and Constructive Fraud

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—

• 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
• Silence is, in itself, equivalent to speech.’ It therefore follows that —
• 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.
• Silence is fraudulent (f 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 contracts of ‘utmost good faith’ .
• Silence is fraudulent where the circumstances are such that ‘silence is, in itself equivalent to speech.

Constructive Fraud in Common Law

Common law and statutes often require a set criteria to impose legal rights or remedies. For example, a contract must have a ”meeting of the minds”, consideration exchanged by the parties, and other criteria to impose contractual duties[8].

At times, the court decides that  justice, from an equitable point of view, requires a result that is not in strict conformity with the facts before the court. Typically, one of the parties cannot develop evidence to prove a vital fact or an event did not occur as the court would require to impose  the typical statutory or common law remedy. In such events, the courts have turned to the notion of ”constructive” development of facts or events so as to allow the appropriate relief[9].

It is not common and it normally requires extreme action by a party before the constructive methodology will be used[10] or it requires the court concluding that such an unfair result will occur that some relief must be granted. But it does happen.

Further Explanation

Fraud is typically defined at law as an intentional misrepresentation of material existing fact made by one person to another with knowledge of its falsity and for the purpose of inducing the other person to act, and upon which the other relies with resulting injury or damage[11].

Fraud may also be made by an omission or purposeful failure to state material facts, which nondisclosure makes other statements misleading. Fraud allows a cause of action against the perpetrator that will make the victim whole.

Constructive fraud is considered as fraud under the law although deceptive intent is missing  because it has the same consequences as an actual fraud would have, such as to prevent violation of a public or private trust or confidence, the breach of fiduciary duty, or the use of undue influence.

Conclusion

In our Law Schools when we read something new, we start developing a imaginary fear about it. This article is a result of same. Constructive fraud though is a very simple subject but it is thought to be very critical. The concepts of constructive fraud will take some more time to develop and the law student should start developing a research on it. Though it is present in Indian Contract Act but there is not much about it in Indian legal database. One can take into account the case of State Bank of India vs. Firm Jamuna Prasad Jaiswal and Others[12] to know this concept better. Recent case of Mr. Kuldip Gandotra vs Union Of India & Ors.[13]. gives a clear picture of Constructive fraud and tries to give it a wider connotation.

 Author: Deban Satyadarshi Nanda

 

[1] ^ “Montana Code Annotated”. Viewed on 28:09:2012

[2] Textbook on Legal Language and Legal Writing,  Prof. Dr. K. L. Bhatia, p. 170

[3]  The View from South Dakota (10-23-11), Jim Hanhardt(web reference: http://www.kokoweef.com/Jim-Hanhardt-Files/Hanhardt-Court-Case-002.pdf) and also see Hagarty v. Ithaca City School District, 423 N.Y.S. 2d 843 (1979).

[4] Constructive Fraud & Constructive Taking, web reference: http://www.businessethics.net/C/constructive_fraud.htm, (accessed on: 13/01/2015)

[5] Small Business Ethics, S. E. Bromberg, web reference: http://www.businessethics.net/business_ethics.pdf

[6] Supra 4

[7] Supra 3

[8] Constructive Fraud and other Legal Construed, web reference: http://stimmel-law.com/articles/constructive_fraud.html, accessed on: 12/01/2015

[9] Ibid

[10] Contracts Outline 2013, web reference: http://www.wcl.american.edu/sba/outline_databank/outlines/Contracts_Kovacic-Fleischer_Fall2003_2.pdf

[11] Consumer Protection & More Successful Construction Projects (We’re In It Together), TASA ID- 8226475914, web reference:http://www.tasanet.com/knowledgeCenterDetails.aspx?docTypeID=2&docCatID=7&docID=326

[12] AIR 2003 All 337

[13] 136 (2007) DLT 44