Consumer fraud occurs when a business or seller intentionally deceives a consumer to gain an unfair advantage, often leading the consumer to make purchases based on false or misleading information. This can include misrepresenting products or services, hiding key terms, using bait-and-switch tactics, or failing to deliver as promised.

This fraudulent behavior often results in a breach of contract(section 73,74 &75 Indian Contract Act, 1872), which happens when one party fails to fulfill their contractual obligations. For example:

If a seller promises a specific product in a contract but delivers something different or defective, it constitutes both fraud and a breach of contract.

If terms of a warranty or return policy are intentionally misrepresented, the consumer may have entered into the agreement under false pretenses, making the contract legally voidable.

Types Of Consumer Frauds

1. False Advertising

Misleading consumers through false or exaggerated claims about products or services is a common form of consumer fraud. An example is advertising a product as "100% natural" when it contains synthetic ingredients, or claiming that a product can perform actions it cannot, such as weight loss claims without scientific backing.

2. Bait-and-Switch

This occurs when a business advertises a product at a very low price to attract consumers but then persuades them to buy a more expensive item when they arrive at the store or website. For instance, a store may advertise a discounted item but inform the consumer that the item is out of stock, pushing them towards a higher-priced alternative.

3. Credit Card Fraud

Credit card fraud involves the unauthorized use of a consumer's credit card details, often obtained through phishing, hacking, or stealing. This fraud allows perpetrators to make fraudulent purchases or access financial information without the consent of the rightful owner.

4. Online Fraud

Online fraud includes scams such as fake online shopping sites, fraudulent subscription services, or phishing emails designed to steal consumers' personal or financial information. For example, a fake e-commerce website may offer popular products at a steep discount but only collect personal details without ever shipping the product.

5. Product Misrepresentation

This type of fraud involves providing false or incomplete information about a product’s features, quality, or purpose. A common example is selling a refurbished product as new, or advertising a product with benefits that it does not possess, leading to consumer confusion and dissatisfaction.

6. Counterfeit Goods

Selling counterfeit goods is a prevalent form of consumer fraud, where fake or imitation products are marketed as genuine. This includes items like luxury goods, electronics, or even pharmaceuticals, which are sold to unsuspecting consumers as authentic products but are inferior or even dangerous.

7. Overcharging or Hidden Fees

This fraud occurs when businesses charge consumers more than the advertised price or add hidden fees that were not initially disclosed. For example, a service provider may offer a free trial but impose hidden charges after the trial period ends, or add unexpected service fees that were not clearly stated upfront.

8. Warranty Fraud

Warranty fraud involves misleading consumers about warranty terms, such as failing to honor product warranties or offering limited coverage that is not communicated clearly. This can include businesses refusing to repair or replace defective products despite promises made in their warranty agreements.

9. Debt Collection Fraud

Fraudulent debt collectors may attempt to collect money that is either not owed or inflated by illegal charges. These collectors often use aggressive tactics such as threats, harassment, or falsifying debts to manipulate consumers into paying more than they owe.

10. Subscription Traps

A subscription trap occurs when a company offers a free trial or a low-cost product, only to later charge the consumer full price once the trial ends, often without clear notice. The company may make it difficult for the consumer to cancel, leading to unintended continued charges for services or products the consumer did not intend to purchase.

11. Pyramid Schemes and Investment Scams

These scams involve business opportunities or investments that promise high returns with minimal risk, but they rely on recruiting new investors rather than generating legitimate profits. The emphasis is on bringing in new participants rather than selling actual products or services, leading to financial loss for the majority of participants while benefiting only the initial recruiters.

These various types of consumer fraud can cause significant financial and emotional harm to consumers, and legal actions are essential to protect rights and hold wrongdoers accountable.

How Does Law Address Consumer Frauds?

The Consumer Protection Act, 2019 (CPA 2019) in India was enacted to address consumer rights and protect against unfair practices, including consumer fraud. It aims to provide a robust legal framework for consumers to seek redressal against fraud, exploitation, and deceptive practices. Here’s how this Act deals with such unfair practices:

Defines ‘Unfair Trade Practices’ (Section 2(47)): The Act defines unfair trade practices, which include misleading advertisements, fraudulent claims, and the sale of counterfeit or substandard goods. It helps protect consumers from being misled or defrauded by businesses engaging in deceptive practices.

Esablishes Central Consumer Protection Authority (CCPA) (Section 10): The CCPA is empowered to take suo motu action against violations of consumer rights, including fraudulent and unfair practices. It can investigate and take action against companies that engage in consumer fraud, such as issuing orders for product recalls, fines, or bans on misleading advertisements.

Establishes Consumer Disputes Redressal Commissions (Section 84): The Act establishes a three-tier system for consumer dispute resolution- District, State, and National Consumer Disputes Redressal Commissions. Consumers who are victims of fraud can file complaints with these commissions to seek compensation, replacement, or refunds for fraudulent products or services.

Provides E-commerce and Online Consumer Protection (Section 94): The Act includes provisions for e-commerce platforms, making them responsible for ensuring that consumers are not defrauded by fake or substandard products. Online platforms must follow guidelines for listing products accurately and transparently.

Deals with False Advertising (Section 21): The Act prohibits false or misleading advertisements. If a company is found to be engaging in false advertising that leads to consumer fraud, it may face penalties, including fines or even a ban on advertising.

Provides for Product Liability (Chapter VI): The Act introduces product liability, holding manufacturers, service providers, and sellers accountable for defective goods or services that cause harm to consumers. If a consumer is defrauded by receiving a faulty product, they can claim compensation under this section.

Compensation and Redressal (Section 72): Consumers who have been victims of fraud are entitled to compensation for any loss, damage, or inconvenience caused by fraudulent transactions. This can include monetary compensation for damage to reputation or mental distress, in addition to the replacement or repair of products.

Penalises for Fraudulent Practices (Section 100): The Act prescribes penalties for businesses found guilty of fraudulent practices, including fines and imprisonment. This serves as a deterrent to companies that might attempt to deceive consumers.

Consumer Protection in Contracts (Section 75): The Act also deals with consumer fraud related to contract breaches, ensuring that consumers are protected from unfair contract terms or fraudulent business practices that violate their rights.

Legal Remedies for Consumer Fraud in India

1. Consumers can file complaints in District, State, or National Consumer Commissions depending on the value of the goods or services. Reliefs may include compensation, refund, replacement, or removal of unfair trade practices.

2. A consumer may initiate a civil suit for damages to recover losses suffered due to fraud, including compensation for mental agony, financial loss, or loss of reputation.

3. In cases involving cheating, forgery, or criminal breach of trust, a criminal complaint can be filed under relevant sections of the Indian Penal Code , Now Bhartiya Nyay Sanhita.

4. Courts may issue injunctions to restrain a business or individual from continuing fraudulent practices.

5. If a service provider fails to meet promised standards or misrepresents their offerings, the consumer can claim compensation for the deficiency.

6. Complaints can also be made to specific regulators such as SEBI (for investment fraud), TRAI (for telecom services), or IRDAI (for insurance-related fraud).

7. The Government of India’s National Consumer Helpline (NCH) and E-Daakhil Portal allow consumers to lodge complaints digitally, making the process more accessible and time-efficient.

Judicial Approach

For Compensation

M/s Daimler Chrysler India Pvt. Ltd. v. Controls & Switchgear Company Ltd [2024 INSC 496]: This case involved a complaint of unfair trade practice, where a vehicle manufacturer was accused of misrepresenting the safety features of a car particularly the failure of airbags to deploy during an accident. The Supreme Court ruled that such misrepresentation qualifies as an "unfair trade practice" under Section 2(1)(r) of the Consumer Protection Act, 2019. Recognizing the deficiency in service, the Court ordered the manufacturer to pay ₹36 lakhs as compensation to the complainant.

Defining 'consumers'

Kozyflex Mattresses Pvt. Ltd. v. SBI General Insurance Co. Ltd. [2024 INSC 234]: The central issue was whether a company could be considered a "person" under the Consumer Protection Act, enabling it to file a consumer complaint. The Supreme Court confirmed that under Section 2(1)(m) of the Consumer Protection Act, 2019, a company does qualify as a "person." Therefore, companies are entitled to file complaints regarding deficiencies in services, such as in cases involving insurance claims.

Omkar Realtors v. Kushalraj Land Developers [2024 INSC 629]: The case concerned the double booking of a residential flat and questioned whether a real estate company could be considered a "consumer" under the Consumer Protection Act. The Supreme Court ruled that real estate companies can fall within the definition of "consumer" under the Act, provided the transaction is not primarily for resale or profit. The Court clarified that the Act protects entities purchasing goods or services for personal or end-use, and therefore upheld the complainant’s status as a consumer.

Consumer fraud undermines trust in the marketplace and can significantly harm individuals and businesses alike. The Consumer Protection Act, 2019 plays a crucial role in addressing such misconduct by clearly defining unfair trade practices and providing accessible remedies for aggrieved consumers. With provisions for both individual and organizational complaints, the Act empowers consumers to seek redressal through compensation, injunctions, and corrective measures. As markets become more digital and complex, robust enforcement of these protections is essential to ensure fairness, accountability, and consumer confidence in India’s economy.