Does Silence amount to Fraud?

“Can a nod, a wink, a shake of the head, or a smile amount to fraud?”

Choosing not to speak does not mean one wishes to conceal something or cause fraud. As famously quoted by Viscount Maugham in Bradford Third Equitable Benefit Building Society v Borders [1941] 2 All ER 205, “mere silence, however morally wrong, will not support an action of deceit”. However, the law has always been able to predict that this will not always be the case where simply saying “I assumed she knew” will validate the act of being silent.

Where does the law stand?

Now, it is apparent that fraud includes acts committed by a person with the intent to deceive another party or to induce him to enter the contract as stipulated under Section 17 of the Contracts Act 1950 (“CA”). This includes;

i.  knowingly making false statements;

ii.  actively concealing a fact;

iii.  making a false promise with no intention of fulfilling it;

iv.  any act or omission that the law considers to be fraudulent, like fraudulent misrepresentation

This provision also made further effort to clarify that, just staying silent about important facts that could influence someone's decision to enter into a contract is not considered fraud. BUT there are two exceptions to this rule. Let’s break this down by differentiating between when silence amount to fraud and when it does not.

Circumstances where Silence Does Not Amount to Fraud

Imagine this,

When purchasing a car, you asked the vendor, “Is the car, ok?” to which he said, “Yes, it’s ok” and says nothing of it being involved in a minor accident during a test drive. THIS IS NOT FRAUD. Why? Let’s get a clearer picture from real life cases.

Supporting Judicial Decisions

1. Lau Hee Teah v Hargill Engineering Sdn Bhd & Anor [1980] 1 MLJ 145

The Appellant entered into a hire-purchase agreement to purchase a bucket loader from the Respondent. The Appellant asked, “Is the machine new or secondhand?”. The Respondent replied that, “Yes, because we only used it once and was not sold or repossessed”, by concealing that it was used and involved in a minor accident during a demonstration. The court dismissed the appeal and stated that;

- The Respondent had no active duty to disclose the year of manufacture of the machine and the fact that it had been involved in a minor accident previously.

-  These matters were not material to prove that non-disclosure was intended to deceive the appellant or to induce him to enter into the hire-purchase transaction.

2. Karuppannan A/L Chellappan v Chong Lee Chin @ Chong Lai Chun [2000] MLJU 438

The Sale and Purchase Agreement contain a clause stating, “free from all trouble (encumbrance)”. Simple as that, the Plaintiff bought the house assuming that, “It’s a new building, it can’t be flawed”. However, dispute arose as the Plaintiff found that the window protrusion of the house needs to be removed out of his own pocket and the Defendant replied, “He didn’t ask me about the window and I forgot about it, it was not intentional”. The court stepped in;

-  There is no such thing as the Plaintiff would not have bought it if he knew of the problem.

-  He was “eyeing” the property all along from the day of its construction and he must have known of it for some time. Surely, he is not that simpleton.

3. Barter Fortune Sdn Bhd v Majurama Development Sdn Bhd [2016] 6 MLJcon 207

The Plaintiff entered into a consent judgment (settlement agreement) with the Defendant to pay off a certain amount but was unaware that CIMB Bank had already settled it. The Plaintiff alleged that the Defendant is guilty of fraud for concealing such fact. The defendant replied that, “That’s absurd! Your own lawyers were there when CIMB was ordered to pay. You cannot claim ignorance now and try to undo a settlement you willingly agreed to.” The court held that;

- There was no active concealment or act of deceit by the Defendant’s as the Plaintiff knew of it. Hence, the Defendant’s assumption that ‘I assumed they knew’ was not far-fetched.

Circumstances where Silence Does Amount to Fraud

Imagine another scenario;

i. You asked, “Does this car have faulty parts?” and the Vendor stayed silent on the minor brake issue. This may amount to fraud as the Vendor has the “duty to disclose” such information.

ii. You asked, “The car’s engine is not old right, if you don’t deny it then I can assume that it is new?” to which Vendor said nothing. Here silence is “equivalent to speech” which creates a false impression, making it just as deceptive as a lie.

Confused on when these will apply? Here are some clarifications.

Supporting Judicial Decisions

Uberrimae Fidei, sounds fancy but it’s just a Latin word for “utmost good faith”. In plain English this means that it is a contract where the parties are under a duty to exercise the utmost good faith as viewed in Leong Kum Whay v QBE Insurance (M) Sdn Bhd & Ors [2006] 1 MLJ 710. Now, a contract for the sale of land is not a contract uberrimae fidei, however an insurance contract is, as there is an absolute/fiduciary duty upon each party to make a full disclosure to the other of all material facts as established in Bacom Enterprises Sdn Bhd v Jong Chuk & ORS [2011] MLJU 481.

ALSO TO TAKE NOTE, A guarantee is not a contract uberrimae fidei. However, if a creditor gets a guarantee by staying silent about important facts, it is not valid.

1. Hong Leong Bank Berhad v Nikman Holdings Sdn Bhd & Others [2002] MLJU 723

In this case, the Plaintiff (Bank) told the 3rd Defendant (Guarantor) that, “The Plaintiff will only give the loan to the 1st Defendant if you agree to be a guarantor”. As usual the 1st Defendant defaulted and the Plaintiff is now coming after the 3rd Defendant as the guarantor —like a plot twist he definitely didn’t sign up for! As an attempt to pull the wool over his eyes, the 3rd Defendant was shown a guarantee letter with the signatures of other directors while hiding the fact that, the Plaintiff had already given the loan to which was defaulted by the 1st Defendant and the true purpose of the guarantee was to release the other directors from their liability. Hence, justice was served.

- The 3rd Defendant has validly proved that if these material facts had been disclosed to him, he would not have signed the guarantee letter.

o Section 96 of the Contracts Act 1950, a guarantee obtained by concealing any material facts of a transaction is invalid.

2. Segar Oil Palm Estate Sdn Bhd v Tay Tho Bok & Anor [1997] 3 MLJ 211

The Vendors made fraudulent concealment to the Purchasers of the land that the water pipelines and cables (“fixtures”) were outside the land but it turned out to be false and took up more acres than expected which led to a higher purchase price. The court held that;

- The vendors’ manner of inducing the purchasers to enter into this contract is unacceptable, they made positive assertions, which they ought to have known were false, instead of clearly stating that the land was being sold "as is."

Analysis from Cases

1. The Thin Line Between Silence and Fraud

The distinction lies in whether there is a duty to disclose. If a party has no legal obligation to disclose certain facts, silence will not amount to fraud, as seen in Lau Hee’s case. However, when the silence is coupled with an intent to mislead or when the contract requires utmost good faith, then withholding material facts constitutes fraud as illustrated in Hong Leong Bank’s case. 

2. The Role of Active Concealment and Partial Truths

Fraud is not limited to explicit falsehoods; active concealment or half-truths can be just as deceptive. Thus, courts assess fraud not only based on what is said but also on what is intentionally left unsaid.

Conclusion

The principle that "mere silence is not fraud" is a foundational one in contract law, yet it is not absolute. While the law acknowledges this rule, establishing proof in such cases presents its own set of hurdles. Therefore, whether you’re a seller, buyer, or guarantor, make sure to ask the right questions, and insist on disclosure. Honesty isn’t just ethical, but it acts as a safeguard in the face of future disputes. “In the world of contracts, what you don’t say can come back to haunt you!