Instruments Obtained by Fraud

The person who obtains the instrument by fraud, cannot claim payment against any party thereto, nor can he retain the instrument against the true owner. The term ‘fraud’ has not been defined in this Act but can be found from section 17 of the Contract Act.




Fraud vitiates all agreements and transactions. The law sets itself against fraud to the extent of breaking through almost every rule sacrificing every maxim and getting rid of every ground of opposition which may be presented, so as to prevent it from succeeding. This principle is applicable to debts evidenced by hundies, promissory notes or other negotiable instruments, if the facts show that the loans were contracted on the fraudulent misrepresentation made by the debtor to a creditor.

If a person obtains an advance of money on a hundi on untrue representations, knowing them to be untrue and also knowing that without them he could not have got the money, the lender is entitled to rescind the contract evidenced by the hundi and to sue at once for the amounts advanced even before the due date of the hundi. Similarly, a person who has been fraudulently induced to sign a bill or note is entitled to repudiate it as soon as he has discovered the fraud and before he has derived any benefit therefrom. When he repudiates the instrument, it cannot be enforced against him by any person other than a holder in due course or a person deriving title from such holder.

Fraudulent misrepresentation will be a good cause for rescinding a contract and will be a good defence to an action on a negotiable instrument and the person defrauding will not be entitled to recover.

Though a defence of fraud cannot be set up against a holder in due course or a holder deriving title from such holder, still, if it could be shown that a person without negligence on his part was induced to sign an instrument, he would not be liable even to a holder in due course. If a man who cannot read has a written contract (e.g., a bill of exchange) falsely read over to him and the contract written differs from that pretended to be read, the signature on the document is of no force; because he never intended to sign the document on which the signature was found.

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