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CHAPTER 2

THE WEAPONS OF LAW

2.3.2Fraudulent Misrepresentation
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What constitutes fraud?


The meaning of fraud (at Common Law) was laid down by the House of Lords in the leading case of Derry v Peek (1889, England).
52


Lord Herschell stated:

First, in order to sustain an action of deceit, there must be proof of fraud, and nothing short of that will suffice. Secondly, fraud is proved when it is shewn that a false representation has been made, (1) knowingly, or (2) without belief in its truth, or (3) recklessly, careless whether it be true or false.53


An absence of honest belief is therefore essential to constitute fraud.54




Every statement is explicitly or implicitly a statement as to the belief of the speaker, and if that belief does not exist the statement is knowingly and wilfully false.
54A


With regard to the statement itself, it is not necessary to prove any specific representation to have been false. It is fraud intentionally to give a false impression and induce a person to act upon it, even though each fact stated taken by itself may be literally true.55 So it is possible by stating a thing partially to make a statement which, in the sense that it must be known it will be understood, is really false. A half-truth may be fraudulent because further relevant facts are suppressed.55A


The false statement may be made either by words or by conduct. Any conduct designed to deceive another by leading him to believe that a certain fact exists is equivalent in law, as in morals, to a statement in words that that fact does exist.
56

 


NOTE!

As already related in Section 2.3.1, ‘under certain circumstances a duty may arise to disclose a material fact, and its non-disclosure may have the same effect as a representation of non-existence’. Silence by a party under a duty to disclose may induce the other party to believe that there is nothing to be disclosed that is relevant to the matter at hand.

But this silence may be a
deliberate or wilful silence, in circumstances where one party knows that he is under a duty to disclose and that his silence with respect to the material facts will induce a belief on the part of the other party that no such facts exist.


Such a deliberate or wilful silence must be seen to transcend negligence and to constitute deceitful conduct; it is fraud, pure and simple. (This issue will be discussed further in Section 2.3.4: The Duty to Disclose and Silence as a Misrepresentation.)


And, IF there is dishonest intent present, as where the deliberately silent party expects or intends to gain by the deceived party being induced to take on an economic risk he would not otherwise have taken, THEN such deliberate or wilful silence must be seen to constitute criminal fraud.


Also, IF there are others who have colluded with or condoned this deception, and who also stand to profit by it, THEN they too must be seen to be equally guilty of criminal fraud.


Note! While the term 'criminal fraud' is not specifically used within the wording of any Statute Law in the United Kingdom or Ireland, it will be used throughout this website-book as a general term for a statutory offence committed in circumstances where one person, dishonestly, by fraudulent means, seeks to make gain for himself or for others by the deception of another. 




In Delany v Keogh (1905, Ireland — Remember Ireland was under British Rule at this time, so this represents the Law in both jurisdictions), Johnson J. said:


A statement untrue in fact, but made without mala fides (i.e. without acting in bad faith), and in the honest belief that it is true, is not evidence of fraud, although made through want of care or even through negligent carelessness or without reasonable grounds for belief in its truth, provided always it is made without mala fides and in honest belief of its truth. Of course it is not sufficient for a person making a representation to induce another to act on it, and who does act on it, to say I honestly believed what I said was true. The grounds on which the honest belief is really entertained and mala fides is absent necessarily depend on the facts of the particular case: and it is obviously of the last importance to investigate and ascertain whether on the evidence the person making the representation has really such honest belief. The authorities supply some tests.

For instance, if a person states what he knows to be false to induce another to act on that statement, it is plain that he has no honest belief in his statement; if he wilfully shuts his eyes to the facts, or purposely abstains from inquiry into them, no reasonable person would in such circumstances infer he had an honest belief in the matter.


For the present purpose it is not necessary to multiply illustrations. False and fraudulent misrepresentation to induce another to act on it may be effectuated by mala fide active concealment (so to speak) with intent to deceive as by actual mala fide false statement. The same principles are equally applicable to such cases, whether the concealment is of a fact, or part of a fact, or by apparent disclosure of a fact, while there is mala fide concealment of that which, if disclosed, would put a wholly different complexion on the disclosure, and show what only is disclosed is false, and fraudulent, and dishonest, because it was not the whole truth.

A lie which is all a lie may be met and fought with outright
But a lie which is part a truth is a harder matter to fight.

In all such cases the question is whether the representation is effected by actual statement or actual concealment, whether it is made dishonestly and intentionally to deceive another, and with intent that the other shall act on it, and so to induce him to act on it; or whether it was made bona fide in the honest belief of its truth; and the solution of this question depends on the evidence in the particular case in which it lies on the plaintiff to prove the alleged fraud and damage.57


 

Active concealment of a fact is equivalent to a positive statement that the fact does not exist. By active concealment is meant any act done with intent to prevent a fact from being discovered.58


Note!
A deliberate silence by a party under a duty to disclose material facts must be seen to have logical equivalence to a deliberate concealment of those material facts. And, again, IF there is also a dishonest intent to make gain from the decision of the deceived party, THEN such dishonest concealment must be seen to constitute criminal fraud.


 

The facts of Pearson v Dublin Corporation (1907, Ireland — Again, remember Ireland was under British Rule at this time, so this represents the Law in both jurisdictions) show that fraud can exist even when the representor does not necessarily know that his statement is false.59

During the tendering process for a construction contract with Dublin Corporation (the defendant), S.Pearson & Son Ltd. (the plaintiff) was told by the defendant’s agent that a wall had been built on the construction site and that the foundations of the wall were nine feet deep. This statement was untrue, and it adversely affected the price contained in the tender subsequently submitted by the plaintiff.59A Pearson & Son Ltd. performed the contract, and brought an action of deceit against the Corporation, claiming damages for false representations as to the position, dimensions and foundations of the wall, whereby they were compelled to execute more costly works than would otherwise have been required.60


When the agent told the plaintiff that the foundations of the wall stood on the site the agent did not know if this was true or false: the statement was nevertheless fraudulent.
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There was the absence of any genuine belief — the presence of conscious ignorance of the truth of the matter.


Note!
Although an absence of reasonable grounds for believing a statement to be true is not in itself a ground for liability, it is important evidence that no such belief really exists and therefore that the defendant is guilty not of Negligence but of Fraud.62


Note!
An important precedent was set in the case of Pearson v Dublin Corporation. While the plaintiffs were induced to enter into the contract as a result of fraudulent statements by the defendant’s agent, clauses in the contract provided that the plaintiff had to verify all representations for himself and not rely on their accuracy. Palles, Chief Baron, held that this provision was effective and he refused to leave an issue to the jury, dismissing the action. The House of Lords granted a new trial. The statement was made by the agent fraudulently; several members of the House of Lords said that, in general, a person cannot avoid the effect of his or her agent’s fraudulent statements by inserting a clause in the contract that the other party shall not rely on them. Any other rule would encourage fraudulent practices.63


 

N.B. The burden of proving Fraudulent Misrepresentation, under Common Law, rests with the party alleging fraudulent misrepresentation.


At Common Law a fraudulent misrepresentation not only renders the contract voidable, and therefore allows the representee to obtain rescission of the contract, but also gives rise to an action for damages in respect of the deceit.64 (These matters will be discussed in detail later in this Chapter, in Section 2.8.1 and Section 2.8.2.)



 


CRIMINAL FRAUD



‘Fraudulent Misrepresentation’, as a statutory offence (i.e. as a crime) will be discussed in Section 2.3.6: Fraud and the Conman —— U.K. Law and Irish Law.


Also, in Section 2.5, we will see where, within its primary legislation governing the Financial Services Industry (i.e. the Financial Services Act 1986 and its successor, the Financial Services and Markets Act 2000), the U.K. legislature has set down in detail what constitutes 'fraudulent misrepresentation' as a statutory offence.

 

52, 53 55 Beatson, Burrows and Cartwright, Anson’s Law of Contract, (29th ed.), p. 320 and 321.

54 Furmston, Cheshire, Fifoot and Furmston's Law of Contract, (15th ed.), p. 341.

54A Heuston and Buckley, Salmond and Heuston on the Law of Torts, (21st ed.), p. 372.

55 Beatson, Anson’s Law of Contract, (28th ed.), p. 245, citing Jeweson & Sons Ltd. v Arcos Ltd. (1933).

55A J. Beatson, Anson’s Law of Contract, (28th ed.), p. 245, citing Peek v Gurney (1873).

56 Heuston and Buckley, Salmond and Heuston on the Law of Torts, (21st ed.), p. 369.

57 Clark and Clarke, Contract Cases and Materials, (4th ed.), p. 539.

58 Heuston and Buckley, Salmond and Heuston on the Law of Torts, (21st ed.), p. 370.

59
Clark, Contract Law in Ireland, (6th ed.), p. 325.

59A Clark, Contract Law in Ireland, (6th ed.), p. 321.

60 Clark and Clarke, Contract Cases and Materials, (4th ed.), p. 536.

61 Clark, Contract Law in Ireland, (6th ed.), p. 325 and 326.

62 Heuston and Buckley, Salmond and Heuston on the Law of Torts, (21st ed.), p. 372.

63 Clark, Contract Law in Ireland, (6th ed.), p. 321 and 322.

64 Beatson, Burrows and Cartwright, Anson’s Law of Contract, (29th ed.), p. 310.

 

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