Fraud and Misrepresentation

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Fraud and Misrepresentation
Fraud and Misrepresentation

The making of representation which a party knows to be untrue, and which is intended or is calculated to induce another to act on the faith of it, so that he may incur damage, is a fraud in law.                                                                                                                                                                                                                                                                                                 Fraud implies a willful act on a part of one, whereby another is sought to be deprived by unjustifiable means, of what he is entitled to.  A false affirmation made by the defendant with intent to defraud to plaintiff, Whereby the plaintiff suffers damage, is the ground of an action for deceit. In such an action, it is not necessary that the defendant should be benefited by the deceit, or that he should collude with the person who is, or that the false representation should have been made from a corrupt motive of gain to the defendant or a wicked motive of injury  to the plaintiff. The tort consists  in the act of making a willfully false statement with intent that the  plaintiff shall act in reliance on it, and with the result that he does so act and suffers harms  in consequence .                                                                                                                                                                                                                                                                                                   (1941) 2 All. E R 205.                                                                                                                                                                                                                                                                                   In the leading case of Derry V. Deek,(1889) 14 App. Cas. 337, Lord Herschel laid down:                                                                                                                                                                          1)” Firstly, in order to sustain an action of deceit, there must be proof of fraud, and nothing short of that will suffice.                                                                                                                            2)  Secondly fraud is proved when it is shown that the false representation has been made; (1) Knowingly

(2) without belief in its truth

recklessly, careless where it be true or false. Although I have treated the second and third as distinct case, I think the third but an instance of the second, for one who makes a statement under such circumstance can have  no real belief in the truth of what he states.                                                                                                                                                                                                                                                     To prevent a false statement being fraudulent, there must, I think, always be an honest belief in its truth.                                                                                                                                               And this probably covers the whole ground, for one who knowingly alleges that which is Fales, has obviously no such honest belief.

3) Thirdly if fraud be proved, the motive of the person guilty of it is immaterial. It matters not that there was no intention to cheat or injure the person to whom the statement was made.

“ In my opinion making a false statement through want of care falls for short of , and is a very different thing, from, fraud, and the same may be said of  a false representation   honestly believed through on insufficient grounds….fraud is essential to founds an action of deceit and it cannot be maintained  where the acts proved cannot properly be so termed….

At the same time, I desire to say distinctly that when a false statement has been made the questions whether there were reasonable grounds for believing it,

And what were the means of knowledge in the possession of the person making it, are most weighty matters for consideration.

The ground upon which a belief was founded is a most important test of its reality….

If I taught a person making false statement had shut his eyes to the facts, or purposely abstained from inquiring into them.

I should hold that honest belief was absent, and that he was just a fraudulent as it he had knowingly stated that which was false.”

Thus, to create a right of action for deceit there must be a fraudulent representation; and representation in order to be fraudulent must be one….

1) What is untrue in fact;

2) Which the defendant knows to be untrue or is in different as to its truth;

3) Which was intended or calculated to induce the plaintiff or a third person to act upon it; and

4) Which the plaintiff or the third person act upon and suffers damage.

1=Falsehood:

There must be an active attempt to deceive by a statement which false in fact and fraudulent in intent. The representation must be a representation of fact.

A mere expression of opinion, which turns out to be unfounded, is not sufficient. There is a wide difference between the vendor of property saying that it is worth so much, and his saying that he gives so much for it.   The first is an opinion which the buyer may adopt if he will, The second is an assertion off fact which, If false to the knowledge of the seller, is also fraudulent.

A suppression of truth may amount to a suggestion of a falsehood (suggestio falsi). Concealment of this kind is sometimes called “Active”,” Aggressive”, or

“Industrious”, but perhaps the word itself, as opposed to non-disclosure, suggests the active element of deceit which constitutes fraudulent misrepresentation.

There must be “such a partial and fragmentary statement of fact, that the withholding of that which is not stated makes that which is stated absolutely false”.

Half the truth will sometime amount to a real falsehood .

If by a number of statements, a person intentionally gives a false impression and induces another person to act upon it, It is nonetheless false although if one takes such statement by

itself there may be a difficulty in showing that any specific statement is untrue.

A mis presentation may be implied from a party`s conduct.

Mere silence with regard to a material fact will not give a right of action unless…..

(A) active artificial means have been taken to prevent the other party from discovering the fact for himself; or

(B) the essence of the transaction implied confidence, reposed in the party concealing, to divulge all material facts.

Non-disclosure when there is no duty to disclose to know fraud. But there may be circumstances when a duty is cast on a person to disclose material fact.

This duty may arise in several ways:

(1) It may be a duty which a man owes to the world at large, such as not to leave a loaded gun in a public place; or (2) duty arising out of fiduciary relationship between

the parties; or (3) a duty arising out of the nature of the contract as when it is bupirimate fidei. When the duty to disclose arises in the first way the action must be founded on

negligence. When it arises either of the two remaining ways the remedy will depend upon the presence or absence of fraud.

If there is no fraud in the sense of deceit, equity will allow rescission with a right to restitution but will not award damages. If however, there is deceit then there is an additional right to

damages founded on tort.

Selling diseased cow:

The defendant sold a cow, fraudulently representing that it was free from infectious disease, and the plaintiff having a placed the cow with five others they caught the disease and died. It was held that the plaintiff was entitled to recover as damages the value of all the cows as the death was the natural consequence of his acting on the faith of

defendant’s representation.

Leading Cases

False representation as to solvency of a person ;

In the leading cases the plaintiff was dealing in cochineal, and at the time when the cause of action defendant leering of this told

the plaintiff that he knew one Falch who would purchase the cochineal. The plaintiff said “Is he a respectable and substantial person “?” certainly he is,” answered the defendant, will

knowing he was not of the sort. On the faith of his representation the plaintiff gives to filch 16 of cochineal of the value of nearly 3,000 (euro)on credit.

upon the bill becoming due it turned out that falch was in solvent, and being unable to recover his money from falch, the plaintiff sued the defendant for making to him a false

representation whereby he was damnified, and it was held that the defendant was liable to the plaintiff to the credit and character of falch.(1789) 3 T.R.51.

 

Selling infectious Pigs :

The defendant sent for sale to a public market pigs which were to his knowledge infected with a contagious

disease; they were exposed for sale subject to a condition that no warranty would be given no compensation would be made in respect of any defect.

The plaintiff bought the pigs and put them with other pigs which become infected; come of the pigs bought as well as some of the other pigs died of the disease. The plaintiff sued

to recover damages for the loss he has sustained. It was held that no action lay, for the defendant`s conduct; in exposing the pigs for sale in the market, did not amount of a representation

that they were free from disease.

Selling unsubstantial house:

Where the vendor of a house, knowing of a defect in the wall, plastered it up and papered it over, it was held that an action for deceit lay,

(2) Knowledge or Ignorance;

The representation must be made with knowledge of its falsehood or without belief in its truth. Unless this is so, a representation which is false give no right

of action to the party injured by it. An untrue statement as to the truth or falsity of which the man who makes it has no belief, is fraudulent, for,in making it he affirms he believes

it, which is false.

(A)  A false statement through went off care falls far short, of and is a very different thing from, fraud, and the same may be said of a false representation

honestly believed through the on insufficient ground. In an action for fraudulent misrepresentation the question is not whether the defendant honestly believed the representation

to be true in the sense assigned to it by the court on objective considerations but whether he honestly believed it in the sense in which he understood it, provided it was a sense in

which the representation might be reasonably understood. If a person has formed no belief whether the statement is true or false, and makes it recklessly without caring whether

it is true or false, an action will lie against him.   But not so if he seamlessly makes the statement without appreciating the importance and significance of the words used unless in difference to their truth is proved.

(B)  If a person makes a representation by which he includes another to take a particular course and the circumstance are afterward altered to the knowledge of a

party making the representation but not to the knowledge of the party to whom the representation is made, it is the imperative duty of the party who has made the representation

to communicate to the party to whom the representation has been made about the alteration in those circumstances.

(C)  As everyone who makes a statement; in order to induce another to act on it, must be taken, at least, to represent that he does believe it, an action lies if he

had no belief, but acted recklessly, careless whether the statement was true or false provided he was conscious that he is not believe the statement. If a man, in the course of

business, volunteers to make a statement on which it is probable that in the course of business another will act, there is a duty which arises toward the person to whom the makes that

statement. There is clearly a duty not to state a thing which is false to his knowledge, and then that there is a duty to take reasonable care that this statement shall be correct.

” If a man, having no knowledge whatever, on the subject, takes upon himself to represent a certain state of facts of exist, he does so at his peril and, if it be done either with a view to

secure some benefit to himself; or to deceive a third person, he is in law guilty of fraud for, he takes upon to warrants his own belief on the truth, of that which he so asserts.

Leading cases.

Careless statement in prospectus:

In the leading case of Derry V.Peek.(1889)15App.Cas.337,an act incorporating a tramway  company provided that carriages might be moved

by animal’s power and with the consent of the Board of Trade, by steam power. The directors issued a prospectus containing a statement that the company had the right by their

Act to use steam power instead of horses.

the plaintiff took shares on the faith of this statement. The Board of Trade refused their consent to the use of steam power and the company was wound up. in an action against the          directors for falls statement it was held that they were not liable for the misrepresentation as they honest believed the statement to be true although they were guilty of same

carelessness in making it.

The rule in Derry. V.Peek does not apply to….

(A) Director issuing a prospectus. The director’s liability. Act was passed owing to the decision in Derry.V.Peek. That Act was embodied in the companies Act 1929 19 & 20 Geo. V,c. 23. See the (Indian) Companies Act, I to 1956 s. 62 the companies Act ,1947 10 & 11 Geo. Vi, c. 47, s.65 both these Act were repealed by the

companies Act,1948. 11& 12 Geo.VI, c.38.section 43 of this Act deals with civil liability for mis-statement prospectus.

(B) Where an estoppel is created. when a person has by his statement, intentionally caused another person to believe a thing to be true a to act upon such believe, he is not allowed

to deny the truth if that thing (s.115, Indian Evidence Act).

(C) Where the law of warranty is applicable. (1891) 3 Ch.82,105; (1893) 1 Q.B.491. (1937) M.W.N.1138.

(D) Where there is a contractual duty to take care in making their statement. (1877) 3 C.P.D

(E) Where there is a fiduciary relationship between the parties or where there are special circumstance. (1940). A .C.932.

(F) Where there is a statutory duty to give correct information. (1911) 2 K.B.149.

(G) Where a statement is made in relation to property of a dangerous character.

(H) Liability under Hedley Byrne & Co.Ltd.V.Heller & Partners Ltd.

 

= Acceptance of bill of exchange without authority:

The defendant accepted a bill of exchange drawn on A, representing that he had A`s authority to do so, and honestly believing that the

acceptance would be sanctioned and the bill met by A. the bill was dishonored; it was held that an action for deceit lay against the defendant by an indorse for value. Absence

of dishonest motive is no defense.

 

= Negligent misrepresentation actionable if there be duty to give information:

Mortgagees of the interest of builder under a building agreement advanced money to him from time to

time on the faith of certificates given by a surveyor that certain specified stage in the progress of the building had been reached. the surveyor was not appointed by the mortgagees,

and there was no contractual relation between him and them.

In consequence of the negligence of the surveyor the certificates contained untrue statement as to the progress of the buildings but there was no fraud on his part.

It was held that the surveyor owed no duty to the mortgagees to exercise care in giving his certificates, and they could not maintain an action against him by reason of negligence.

B, being entitled under a settlement   to a life-interest in a trust fund, applied to the plaintiff for a load on security of such life-interest and referred him to a trustee of the settlement

for information. The plaintiff asked the trustee mentioned certain plaintiff made an advance to B, but subsequently discovered that the life-interest was subject to several incumbrances

prior to his own not mentioned by the trustee. the plaintiff`s security being insufficient, he brought an action against the trustee to have him declared liable for the   amount

due on the security. It was held that the trustee was not liable either on the ground of fraud, breach, of duty warranty or estopple.

 

= Representation should be false to the knowledge of the person making it ….Quality of precious stone unknown to the seller:

The defendant sold to the plaintiff stone, which he affirmed to be Bezoar stone, but which proved

not to be so. It was held that no action lay against hi, unless he either knew that it was not a Bezoar stone, or had warranted it to be a Bezoar stone.

 

(3) Representation must be to induce a person to act on it:

The representation must have been intended, from the mood in which it is made, to induce another to act on the faith

of it.it is not necessary that the representation should be made to the plaintiff directly; it is sufficient if it is made to a third person to be communicated to the plaintiff is one, or to be

communicated to a class of person of whom the plaintiff is one, or even if it is made to the public generally with a view to its being acted on, and the plaintiff, as one public, acts

on it suffers damage thereby. where the defendant sold a gun to the father of the plaintiff, for the use of himself and his son, representation that the gun was made by a well-known

maker and safe to use and the gun, which exploded injuring his hand, it was held that the defendant was liable to the son, not on his warranty for there was no contract between

them, but deceit. A tradesman, who contracts with an individual for the sale to him of an article to be used for particular purpose by a third person, is not, in the absence of fraud

liable for injury, caused to such person by some defect in the construction of the artical.

 

(4) Injury to plaintiff:

The false representation should have been made with the intent that it should be acted upon by a person in the manner that occasion injury or loss. the plaintiff

must show that he was deceived by the fraudulent statement and acted upon it to his prejudice. Where the defendant sold a steel cannot to the plaintiff, having concealed a defect

in it, and the plaintiff never inspected the canon, which owing to the defect, burst on being used, it was held that the defendant was not liable, as the plaintiff never inspected the gun

and was not deceived by the attempted fraud

Fraud without damage, or damage without fraud, give no cause of action; but where these two concur an action lies . An action

cannot be supported for telling a bare naked lie, that is saying a thing which is false , knowing or not knowing it to be so, and without any design to injure , cheat ,or deceive another

person. Every deceit comprehends a lie, but a deceit is more than a lie on account of the view with which it is practiced, its being coupled with some dealing, and injury which it is

calculated to occasion, and does occasion, to another person. the injury must be the immediate, and not the remote, consequence of the representation made. if the representation

is untrue it is no defense that the person to whom the representation was made had means of discovering, and might, with a cursory inquiry into facts. To escape liability the defendant

must show either that plaintiff had knowledge of the facts which showed it to be untrue, or that he stated in terms, or showed clearly by his conduct, that he did not rely on the

representation.

 

= Selling injurious hair-wash:

The plaintiff, husband and wife, by their declaration alleged that the defendant, in the course of his business, professed to sell a compound

represented by him to be fit to be used for a hair-wash; The husband thereupon bought a bottle of the hair-wash which was used by wife, who injured by the wash.

it was held that the declaration disclosed a good cause of action.

 

Train announced as running taken off:

 

Where a train which had been take off was announced as still running in the current time-table of a railway company, this was a false representation, and a person who by relying on it

had missed an appointment and incurred loss, was held to have an action for deceit.

 

=False statement regarding shares:

Where a director of a company put forth transferable shares into the market, and published and circulated false statement and representations for

the purpose of selling the shares, the false representation was deemed in law to be made to all persons who read the public announcements, and become purchasers of shares

on the faith of the statement contained in them.

 

= False announcement of sale:

The defendant had inserted in a newspaper an advertisement that a certain farm was to be let with immediate possession. the plaintiff went down to

see the farm and incurred expenses in examining the property. The defendant knew at that time he inserted the advertisement that he had not the power to let arm, and that it was not

to be let. it was held that this amounted to a false representation and defendant was liable.

 

=  prospectus cases:

A prospectus for an intended company contained misrepresentation of facts known to the directors who issued it. Being addressed to the public, any one might

take up the prospectus and appropriate to himself its representation, by applying for any allotment of a shares. It was held that when the allotment was completed the office of the

prospectus was exhausted, and that a person who had not become an allottee ,but was only a subsequent purchaser of shares in the in the market, was not so connected with

the prospectus as to render those who had suffered in liable to indemnify him against the losses which he had suffered in consequence. But where a prospectus is issued not

merely to induce application for an allotment of shares but also to induce person to purchase the shares in the market the function of the prospectus is not exhausted upon the

allotment of shares; and a person who having received a prospectus afterward purchases shares in the open market relying upon false representation contained in such

prospectus, has a cause faction against the promoters in respect of such false representation if the thereby sustains a loss.

 

=Negligent misrepresentation as to credit:

A negligent though honest misrepresentation, spoken or written, may give rise to an action of damage for financial loss caused thereby,

apart from any contract or fiduciary relationship. Since the law will imply, a duty of care when a party seeking information from a party possessed of a special skill

trusts him to exercise due care, and that party knew or ought to have known that reliance was being placed on his skill and judgment.

 

= Fraudulent representation as the credit:

A fraudulent representation as the credit or financial ability of a person is actionable at common law.

Thus if A sells goods to B on credit on the faith of a representation made by C to A that B might be safely trusted, and the  representation is false, and  made with intent to induce

A to sells the goods on credit to B.C is liable to A at common law for the loss occasioned to A by his fraudulent misrepresentation.

Since, however lord tentenrden`s Act no action can brought in England in respect of such a misrepresentation unless it was made in writing signed by the party to be charged       therewith. There is no such Act in Pakistan, and the liability will attach whether the representation is written or verbal.

 

Damage:

The plaintiff may recover damage to any injury which is the direct and natural consequence of his acting on the faith of the defendant`s representations.

The damage are arrived at by considering the difference in the position a person would have been in had the representation made to him been true and the position

he is actually in, in consequence of its being untrue. All who profit more or less by a fraud, and all who aid and abet it, as well as those who directly commit it, are liable in damages.

Where the dealer sold to the plaintiff a cow and fraudulently representable that it was free from infectious disease, when he know that it was not, and the plaintiff having placed the cow

with five others, they caught the disease and died, it was held that the plaintiff was entitled to recover as damage the value of all the cows.

 

Misrepresentations made by Agents;

The fraud pf the agent, acting within the scope of his employment, is the  fraud of the principal. But the liability of the principal

depends on several considerations;

  1. A)The principal knows the representation to be false.

(1)     He authorizes the making of it. in this case whether the agent knows  it to be false or thinks it to be true  the principal liable.

If the agent knows that it is false, he is liable;                                                                                                                                                                                                                                                                                                                  if he believes it to  be true he is not liable.

(2) The representation is made by the agent in the general course of his employment, but without any specific authorization from the principal.

The principal is liable.

 

If the agent knows that the statement is false, he is liable; but if he believes it to be true, he is not liable.

 

It matters not in respect of the principal and the agent which of them possesses the guilty knowledge or which of them makes the incriminating statement. If between them the

misrepresentation is made so as to induce the wrong, and thereby damage is caused, it matters not, which is the person who makes the representation or which is the person

who has the guilty knowledge.

  1. B)The principal thinks the representation to be true.

(1) He authorizes it to be made. When …

(A) The agent knows at the time, or find out afterword’s that it is false, the principal is liable.

(B)  The agent thinks it to be true.  here the principal is not liable.

(C) The agent makes the representation is a general course of his employment, but without any special authorization when….

=The agent knows it is false, the principal is liable. it is not necessary that the principal should have derived my benefit from the fraud of his agent.

=The agent thinks it to be true, the principal is not liable,

 

Thus, we find that the principal is liable in all possible cases expect when both he had his agent believe the latter’s misrepresentation to be the truth.

When a man has made a statement untrue to his knowledge to induce another, whom, he does not believe to know its untruth, to act upon it, and that other has acted upon it,

In ignorance and to his damage, the maker of the false representation is not allowed to protect himself by proving that an agent of other knew of the untruth.

 

The plaintiff, having for some time, on a guarantee of a defendants, supplied. D a customer of theirs with oats on credit, for carrying out a Government contract, refused to continue

to do so unless he had a better guarantee.  The defendant’s manager. Thereupon give him a written guarantee to the effect that the customer’s cheque on the banking plaintiff`s favor in

payment of the oats supplied, should be paid, on receipt of the Government money in priority to any other payment ” except to this bank.”D was then indebted to the bank in the amount

of 12000(euro) but this fact was not known to the plaintiff, nor was it communicated to him by the manager.

The plaintiff thereupon supplied the oats to the value of 1,227(euro)

The Government money amounting to 2,676(euro) was received by D and paid into the bank; but D`s cheque for the price of the oats drawn on the bank in favor of the plaintiff was

dishonored by the defendants, who claimed to detain the whole sum of 2,676(euro) in payment of D`s debt to them.

The plaintiff having brought an action for false representation, it was held (1) that there was evidence to go to the jury that the manager knew and intended that the guarantee should

be unveiling and fraudulently concealed from the plaintiff the fact which would make it so; and (2) that the defendants would be liable for such fraud. (1867) L.R 2 Ex.259.

An officer of a banking corporation, whose duty it was to obtain the acceptance of bills of exchange in which the bank was interested fraudulently, but without the knowledge of the

president or directors of the bank, made representation to A, which, by omitting a material fact, misled A, and induced him to accept a bill in which the bank was interested and

A was compelled to pay the bill; it was held that A could recover from the bank the amount so paid, and that in action of deceit, the fraud of the agent might be treated for the purpose

of pleading, as that of the principal. (1874) L. R 5 P.C 394. In Fauntleroy forgery case, Fauntleroy who was a partner in the banking house of Marsh & Co., forged powers-of-attorney

for the sale of stock belonging to the customers of the bank. Marsh & Co. Had an account with Martin: Stone & Co., and the broker who sold the stock under the forged power-of-

attorney remitted the proceeds of the sale, to the credit of Marsh & Co., with Martin, Stone & Co. Fauntleroy then drew of these moneys, by a cheque signed by him in the name

of his frim, and applied them, to his own use. the frim Marsh & Co. was, however held liable for them although none of the partners except Fauntleroy had any hand in the forgeries

or fraud or in fact know anything of what had taken place.

(1827) 6 B & C.551;(1834) 1 M. & A. 592,2 C & F.250 ;(1828) Cr. &. M.130

The defendant was a solicitor practicing in London, with a branch office at another town which was managed by C. The plaintiff was induced by a fraud, to which C was a party to advance money to a person alleged by Cto be a Clint of the branch on mortgage of freehold property. The supposed title to the property was fictitious and the title deeds were forgeries. No allegation was made against the solicitor but the plaintiff claimed damages for fraud on the basis that the solicitor was responsible for fraud of his agent. It was held that notwithstanding the fact that the person defrauded were not client of the solicitor and that C s fraud involved the uttering of a forgery, the solicitor was answerable in damages for it.

 

 

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