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Fraudulent Device Rule

Misrepresentation and Fraud, Actions for

RETLA clause, The

Silence With Regard to a Material Fact

Illegal contracts.

There can be no fraud if the bargain be merely a fair contest, or trial of judgment. In all contracts, each party naturally and fairly attempts to obtain advantage. As in a contract of sale, the vendor endeavours to extol the article, the vendee to depreciate; each exercises his own judgment, and neither party can be said to be guilty of a fraud in making bare assertions, upon which the other party probably places no reliance, and which he does not embody in his contract.

A practical treatise on the law of contracts, not under seal; and upon the usual defences to actions thereon. Joseph Chitty, 1834.

Fraudulent Representation
Last updated: 28-Nov-2015

In Sanders v McLean (1883) 11 Q. B. D. at p. 343 per Lord Justice Bowen:

The object of mercantile usage is to prevent the risk of insolvency, not of fraud; and anyone who attempts to follow and understand the Law Merchant will soon find himself lost, if he begins by assuming that merchants conduct their business on the basis of attempting to insure themselves against fraudulent dealing. The contrary is the case. Credit, not distrust, is the basis of commercial dealings. Mercantile genius consists principally in knowing whom to trust and with whom to deal, and commercial intercourse and communication is no more based on the supposition of fraud, than it is on the supposition of forgery.

Per Lord Herschell in Derry v Peek (1889) 14 AC 337 at 374:

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.

Although I have treated the second and third as distinct cases, I think the third is but an instance of the second, for one who makes a statement under such circumstances 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 false, has obviously no such honest belief.

Per Morris LJ Brown Jenkinson & Co Ltd v Percy Dalton (London) Ltd, [1957] 2 QB 621 at pp.622-3:

… at the request of the defendants, the plaintiffs made a representation which they knew to be false and which they intended should be relied upon by persons who received the bill of lading, including any banker who might be concerned. In these circumstances, all the elements of the tort of deceit were present. Someone who could prove that he suffered damage by relying on the representation could sue for damages. I feel impelled to the conclusion that a promise to indemnify the plaintiffs against any loss resulting to them from making the representation is unenforceable. The claim cannot be put forward without basing it upon an unlawful transaction. The promise upon which the plaintiffs rely is in effect this: if you will make a false representation, which will deceive indorsees or bankers, we will indemnify you against any loss that may result to you. I cannot think that a court should lend its aid to enforce such a bargain.

Rix LJ stated that there is no conclusive authority to restrict, as a matter of law, a principal from  excluding liability for his agent’s fraud in the negotiation of a contract. He said in HIH Casualty and General Insurance Ltd v Chase Manhattan Bank [2001] EWCA Civ 1250;  at para [110] that such a task required the clearest words and therefore not easy to fulfil:

…for fraud to be excluded requires the clearest possible wording. Parties to a contract assume honest dealing with one another. To warn a potential contracting party of an agent’s possible fraud would be a remarkable clause to find in any agreement. That is no doubt one reason why the point of principle has never previously had to be decided.

Shogun Finance Ltd v Hudson [2004] 1 AC 919, per Lord Nicholls of Birkenhead (in his dissenting judgment) at p.932:

[6]…A contract of sale and purchase, like any other contract, requires agreement, a meeting of minds. The seller must intend, or appear to intend, to sell the goods, and the buyer must intend, or appear to intend, to buy the goods on the agreed terms. The presence of fraud does not negative the existence of such an intention on the part of either party. Fraud does not negative intention. A person’s intention is a state of mind. Fraud does not negative a state of mind. The existence of a fraudulent misrepresentation means that a person’s intention is formed on a false basis--a basis, moreover, known by the other party to be false. The effect of fraud is to negative legal rights or obligations otherwise flowing from an intention to enter into a contract. Fraud enables the victim of the fraud to decline to proceed with a contract into which, by reason of the fraudulent misrepresentation, he was induced to enter, and he has a claim for damages for any loss he may suffer. But fraud does not have the consequence of negativing the formation of a contract.

[7]…Whether a person has consented to this or that is a question of fact. Fraud does not negative a fact. As with intention, so with consent, fraud negatives legal rights or obligations otherwise flowing from a person having given his consent to a particular happening. Fraud can destroy legal rights; it cannot destroy facts.

[8] This distinction, between negativing intention or consent and negativing the rights otherwise flowing from intention or consent, is important. It explains why the law treats a contract induced by fraud as voidable, not void. The necessary coincidence of intention, or consensus ad idem, may exist even where the intention and consent of the victim were induced by fraud. An intention thus induced is regarded by the law as sufficient to found a contract, even though the victim may repudiate the contract as soon as he discovers the fraud.

AIC Ltd v ITS Testing Services (UK) Ltd (The Kriti Palm) [2006] EWCA Civ 1601, per Lord Justice Rix at paras 253-254:

253. It is sometimes said that the necessary representation must be unequivocal. That is too broad a statement to be accurate. Because dishonesty is the essence of deceit it is possible to be fraudulent even by means of an ambiguous statement, but in such a case it is essential that the representor should have intended the statement to be understood in the sense in which it is understood by the claimant (and of course a sense in which it is untrue) or should have deliberately used the ambiguity for the purpose of deceiving him and succeeded in doing so: see Clerk & Lindsell on Torts, 19th ed, 2006, at paras 18-23 and 18-33; Akerhielm v De Mare [1959] AC 789 (PC). As Cotton LJ said in Arkwright v Newbold (1881) 17 Ch D 301 at 324:

In my opinion it would not be right in an action of deceit to give a plaintiff relief on the ground that a particular statement, according to the construction put on it by the Court, is false, when the plaintiff does not venture to swear that he understood the statement in the sense which the Court puts on it.

254. It remains true, however, that in any case of fraud the dishonest representation must be clearly identified.

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