Under Section 19 of the Indian Contract Act, 1872, as amended (“Contract Act”), if the consent of a party to the agreement is caused by coercion, fraud or misrepresentation, the agreement becomes voidable at the option of that party.

However, the Exception to Section 19 of the Contract Act  provides that “[i]f such consent was caused by misrepresentation or by silence, fraudulent within the meaning of section 17, the contract, nevertheless, is not voidable, if the party whose consent was so caused had the means of discovering the truth with ordinary diligence”

It is often misunderstood that the Exception applies to all cases of fraud under Section 17 of the Contract Act. However, this is not correct.

Fraud under Section 17 of the Contract Act includes any of the following acts committed by a party with the intention to deceive another party (or to induce that party) to enter into a contract (a) consciously making an incorrect suggestion; (b) active concealment of a known fact; (c) making a promise without the intention of performing it; (d) any other act fitted to deceive; and (e) an act or omission declared by law to be fraudulent.

Further, the Explanation to Section 17 clarifies that silence (for the purpose of inducing a party to enter into a contract) constitutes fraud if, in the circumstances of the case, “it was the duty of the person keeping silence to speak”.

In John Minas Apcar v. Louis Caird Malchus, reported at ILR (1939) 1 Cal 389 (“John Minas Case”), at pages 393 to 398, Lort-Williams J speaking for a Division Bench of the Calcutta High Court held that the only species of fraud covered by the Exception of Section 19 is “… by silence, fraudulent within the meaning of Section 17…”. The Court explained that the use of “by” twice in this Exception, i.e. “by misrepresentation or by silence”, indicates that the words fraudulent within the meaning of Section 19 only qualify the word silence and not to any other species of fraud, including a case of fraudulent misrepresentation.

Therefore, if a party had the means of discovering the truth with ordinary diligence, a contract would not be rendered voidable only in cases of (a) innocent misrepresentation within the meaning of Section 18 of the Contract Act; and (b) fraud by silence, within the meaning of Section 17 of the Contract Act.

As a result, a case of active concealment constituting fraud within the meaning of Section 17 of the Contract Act does not invite any standard of “means of discovering the truth with ordinary diligence” in terms of the Exception to Section 19 of the Contract Act.

In footnote 45 of paragraph 45, the Supreme Court of India addressed this distinction specifically in Avitel Post Studioz Ltd. v. HSBC PI Holdings (Mauritius) Ltd., reported at (2021) 4 SCC 713 (“Avitel Case”) and clarified that “…the exception in Section 19 does not apply to fraudulent misrepresentation as the words “by silence” alone go with the word “fraudulent”, thus not applying to cases of fraudulent misrepresentation.” The Supreme Court affirmed the principle laid down John Minas Case.

Following the Supreme Court’s decision in Avitel Case, the Division Bench of the Delhi High Court, in Sangam (India) Ltd. v. National Highways Authority of India, reported at 2024 SCC OnLine Del 3667 (“Sangam Case”), at paragraphs 6, 10 to 15, also applied this principle to correct an order issued under Section 34 of the Arbitration and Conciliation Act, 1996 relying upon this Exception. The Division Bench held that the Exception to Section 19 has no application where the contract has been procured through deliberate fraud, regardless of whether the defrauded party had the means of discovering the truth.

The ordinary diligence Exception to Section 19 applies to a defrauded party who has been innocently misled or who has failed to read the significance of another’s silence. It has no application where a defrauding party deliberately concealed or fraudulently misrepresented material facts at the time of contracting. A contrary reading would produce startling results, placing the burden of detecting another’s fraud upon its victim. The doctrinal basis for this position now rests firmly in the statutory text, as interpreted by clear judicial precedent, and is no longer res integra.

Gaurav Pachnanda is a Senior Advocate, based in New Delhi, whose practice includes a wide range of commercial litigation and arbitration.