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THE LAW OF FRAUD

CIVIL CLAIMS IN FRAUD

Where he wishes to rely on them in support of his claim, a claimant is required specifically to set out

in his particulars of claim any allegation of fraud, details of any misrepresentation, details of all

breaches of trust and notice or knowledge of facts (CPR Rule 16.4€, note 16.4.4 and CPR Part 16

PD8.2). The facts must be so stated as to show distinctly that fraud is charged (Garden Neptune v

Occidental [1989] 1 Lloyd’s Rep. 305, 308; Davy v Garrett (1878) 7 Ch.D. 473 at 489). Where any

inference of fraud or dishonesty is alleged, the party must list the facts on the basis of which the

inference is alleged (Chancery Guide at 2.8 and 2.9; Queen’s Bench Guide at 5.6.3; Commercial Court

Guide at C1.2.b.).

As to particulars of knowledge, it has been said that it is sufficient when alleging fraud that the

pleading expressly states that the defendant had the relevant knowledge, it being open to the

defendant then to seek particulars if necessary: Rigby v Decorating Den Systems Ltd LTL 15/3/99,

(unreported) CA.

The standard of proof required at trial is the civil standard of proof required at trial is the civil standard

of a preponderance of probability. It is not an absolute standard. A civil court, when considering a

charge of fraud, will naturally require for itself a higher degree of probability than that which it would

require when asking if negligence is established. It does not adopt so high a degree as a criminal court,

but it still does require a degree of probability commensurate with the occasion (Hornal v Neuberger

Products Ltd. [1957] 1 Q.B. 247; Blyth v Blyth [1966] A.C., 643 (HL); Parks v Clout [2003] EWCA Civ 893).

Misrepresentation. Misrepresentation straddles negligence and fraud, and may arise under any of

the following separate sets of circumstances:

(a) where the misrepresentation is made dishonestly, i.e. fraudulently, in a common law action

of deceit;

(b) where the misrepresentation is made innocently, i.e., not fraudulently, under s.2 of the

Misrepresentation Act 1967;

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(c) where the misrepresentation is made negligently, in a common law action for negligent

misrepresentation under the doctrine of Hedley Byrne (Hedley Byrne & Co. Ltd v Heller &

Partners Ltd [1964] A.C. 465);

(d) where the misrepresentation is made in breach of statutory duty, in an action for breach of

such duty, e.g. under s.10 of the Land Charges Act 1972 (see Ministry of Housing and Local

Government v Sharp [1970] 2 Q.B. 223 applied in Ross v Caunters [1980] Ch. 297; Lawlon v

B.O.C. Transhield Ltd [1987] I.C.R. 7; Mills v Winchester Diocesan Board of Finance [1989] Ch.

428).

Non-fraudulent misrepresentations. Where the representatives is not made fraudulently, an action

for damages may nevertheless lie under s.2 of the Misrepresentation Act 1967, which, to the extent

to which it applies, has altered the former principle of law that no such action would lie for a mere

innocent misrepresentation, not made negligently and not amounting to a warranty (see Heilbut,

Symons & Co v Buckleton [1913] A.C. 30). Section 2(1) of the Misrepresentation Act 1967 provides as

follows:

“Where a person has entered into a contract after a misrepresentation has been made to him

by another party thereto and as a result thereof he has suffered loss, then, if the person

making the misrepresentation would be liable to damages in respect thereof had the

misrepresentation been made fraudulently, that person shall be so liable notwithstanding that

the misrepresentation was not made fraudulently, unless he proves that he had reasonable

ground to believe and did believe up to the time the contract was made that the facts

represented were true.”

The extension of liability for misrepresentation to innocent misstatements under s.2 of the

Misrepresentation Act 1967 and to negligent misstatements under the doctrine of Hedley v Byrne may

well mean that, in many cases, the claimant need not and perhaps should not undertake the heavier

burden of pleading and proving a charge of fraud. Where charges of fraud are made which are not

sustained, the judge has power to order the party making such charges to pay the costs occasioned

thereby (Parker v McKenna (1874) 10 Ch. App. 96).

FRAUDULENT MISREPRESENTATION OR DECEIT

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Necessary elements of an action in deceit. In order to sustain the common law action of deceit, the

following facts must be established, i.e. they must be pleaded and proved, namely:

(1) there must be a representation of fact made by words or by conduct and mere silence is not

enough;

(2) the representation must be made with knowledge that it is false, i.e. it must be wilfully false

or at least made in the absence of any genuine belief that it is true or recklessly, i.e. without

caring whether his representation is true or false (Derry v Peek [1889] 14 App. Cas. 337);

(3) the representation must be made with the intention that it should be acted upon by the

claimant, or by a class of persons which will include the claimant, in the manner which resulted

in damage to him;

(4) it must be proved that the claimant acted upon the false statements; and

(5) it must be proved that the claimant has sustained damage by so doing (see Bradford Third

Equitable Benefit Building Society v Borders [1941] 2 All E.R. 205 at 211, per Viscount

Maugham).

For a recent application of the above principles see A v B [2007] 3 F.C.R. 861 at paras 42 and 43.

The representation. The representation must usually be a matter of fact or law, not opinion or

intention. It can be a statement which is implied from the context in which words are spoken (R. v

Banaster [1979] R.T.R. 113), or by conduct (Ray v Sempers [1974] A.C. 370), if it is intended to induce

the other part to believe a certain fact. In this regard context is everything: see AIC Ltd v ITS Testing

Services (UK) Ltd (The Kriti Palm) [2007] 1 All E.R. (Comm) 667 at para. 252 per Rix L.J. However, in

certain circumstances a statement of opinion or of intention may be regarded as a statement of fact.

If it can be proved that the person who expressed the opinion did not hold it, or could not, as a

reasonable man having his knowledge of the facts, honestly have held it, the statement may be

regarded as a statement of fact (Economides v Commercial Union Assurance Co. Ltd [1998] Q.B. 587

at 598, per Simon Brown L.J.).

Active concealment of a material fact, whether in whole or in part, may operate as a misrepresentation

(Schneider v Heath (1813) 3 Camp. 406) (Equally, partial disclosure), but mere non-disclosure of facts

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will not give a cause of action (Smith v Hughes (1871) L.R. 6 Q.B. 597) unless there is a duty of

disclosure, e.g. where there is a fiduciary relationship. Where a statement is made which is true when

it is made but, subsequently and before it is acted upon by the claimant, it ceases to be true to the

knowledge of the defendant, there may be an action in fraudulent misrepresentation (Davies v London

Provincial Marine Insurance Co (1878) 8 Ch.D. 469; Brownlie v Campbell (1879-80) L.R. 5 App. Cas. 925;

Arkwright v Newbold (1881) 17 Ch.D. 301). The court will examine whether a subsequent statement

made to the claimant or information provided to him is sufficiently complete to correct the

misrepresentation (Morris v Jones [2002] EWCA Civ. 1790, applied in Clinicare Ltd (formerly known as

Strasbourgeoise UK Private Health Insurance Services Ltd) v Orchard Homes & Developments Ltd

[2004] EWHC 1694 (QB), Moses J.).

Dishonesty. The essence of the action of deceit is dishonesty, though not dishonesty in the criminal

sense. The relevant intention is that the false statement shall be acted upon by the person to whom

it is addressed: Standard Chartered Bank v Pakistan National Shipping Corporation (No 2) [2000] 1

Lloyd’s Rep. 218 (reversed but not on this point). The action will lie where the defendant, in order to

induce the claimant to act upon his representation, fraudulently or recklessly, (i.e. without caring

whether his representation is true or false) represents as true a matter of which he knows nothing

and which is in reality untrue, if the claimant is thereby induced to act upon such representation to

his loss (Derry v Peek (1889) 14 Application. Cas. 337 at 359, per Lord Herschell). It is not enough to

show that the representation was made without any reasonable ground for believing it to be true, and

that it was in fact false; it must be proved to have been made dishonestly. For a recent reinstatement

of the relevant principles see AIC Ltd v ITS Testing Services (UK) Ltd (The Kriti Palm) [2007] 1 All E.R.

(Comm) 667 at paras 256 to 259 per Rix L.J.

Inducement. A statement made by the defendant without an intention to induce the claimant to act

upon it is not sufficient ground for an action (Tackey v McBain [1912] A.C. 186). In cases of fraud there

is said to be an inference of fact, sometimes called a “presumption of inducement”, where the

representation is of facts obviously material to a reasonable person (Pan Atlantic Insurance Ltd v Pine

Top Ltd [1995] 1 A.C. 501 at 542; St Paul Fire and Marine Insurance Co Ltd v McConnell Dowell

Constructors Ltd [1996] 1 All E.R. 96 at 112). The inference is rebutted by proof that the representee

knew the true facts, or did not in fact rely on the representation. If the representation was one which

was unlikely to influence a reasonable person, the representee may still succeed if he can show that

he was in fact induced by the statement (Museprime Properties Ltd v Adhill Properties Ltd [1990] 2

E.G.L.R. 196).

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It is immaterial that a party who acted on a misrepresentation may have been influenced by his own

mistake as well (Edgington v Fitzmaurice (1886) 29 Ch.D. 459). Contributory fault does not give rise to

apportionment of damages in a claim in deceit (Redgrave v Hurt Bank v Pakistan National Shipping

Corp. [2002] 3 W.L.R. 1547 approved Alliance & Leicester Building Society v Edgestop Ltd [1993] 1

W.L.R. 1462. The reasoning in Williams v Natural Life Health Foods [1993] 2 All E.R. 577 that negligent

misrepresentation did not apply to liability for fraud. Alliance & Leicester Building Society v Edgestop

Ltd [1993] 1 W.L.R. 1462 at 1477; Standard Chartered Bank v Pakistan National Shipping Corp. (Nos 2

and 4) [2003] 1 A.C. 959 at [10]-[18] per Lord Hoffmann, approving the majority of the Court of Appeal.

Damage. The claimant must prove that in consequence of acting upon the misrepresentation he has

suffered damage which is the gist of the action (see Smith v Chadwick (1884) 9 App. Cas. 187 at 196,

per Lord Blackburn). The applicable measure of damages is the tort measure and not the contract

measure (i.e. not the “bargain” or “expectation” measure). The court compares the position the

claimant was in before the fraudulent inducement to that which he is in after the fraudulent

inducement. The measure of damages is all the loss which directly flows from the fraud perpetrated,

whether or not foreseeable, and includes consequential losses (Doyle v Olby (Ironmongers) Ltd [1969]

2 Q.B. 153; Smith New Court Securities Ltd v Scrimgeour Vickers (Asset Management) Ltd [1997] A.C.

254, able for losses which the claimant would have suffered even if he had not entered into the

transaction or for losses attributable to causes which negative the causal effect of the

misrepresentation (Banque Bruxelles Lambert Saturday v Eagle Star Asset Management [1997] A.C.

191 at 216, per Lord Hoffmann). Once the fraud has been discovered the claimant is obliged

reasonably to mitigate its loss; and in “any case where the person deceived has not himself behaved

with reasonable prudence, reasonable common sense, or can in any true sense be said to have been

the author of his own misfortune” he will not recover those losses attributable to his own conduct

(Doyle Olby (Ironmongers) Ltd [1969] 2 Q.B. 153; Smith New Court Securities Ltd v Scrimgeour Vickers

(Asset Management) Ltd [1997] A.C. 254, HL). P v B (2001) 1 F.L.R. 1641 sort of deceit applies between

cohabitating couples. In assessing the measure of his loss, a claimant will also be required to give

credit for any benefit received from the fraud (Midco Holdings v Piper [2004] EWCA Civ 476)

A person who has been induced to enter into a contract by the fraudulent misrepresentation(s) of the

counterparty to the contract may rescind the contract or claim damages, or both: Archer v Brown

[1985] Q.B. 401.

Fraudulent misrepresentation as to credit. Any claim in deceit (or under s.2(1) Misrepresentation Act

1967) where a representation is alleged to have been made as to the credit or creditworthiness of a

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third party is only actionable if the representation has been made in writing, signed by the defendant.

Section 6 of the Statute of Frauds Amendment Act 1828 (Lord Tenterden’s Act) provides:

“no action shall be brought whereby to charge any person upon or by reason of any

representation or assurance made or given concerning or relating to the character, conduct,

credit, ability, trade, or dealings of any other person, to the intent or purpose that such other

person may obtain credit, money, or goods upon, unless such representation or assurance be

made in writing, signed by the party to be charged therewith.”

The scope of the Lord Tenterden’s Act applies only to fraudulent representations (Banbury v Bank of

Montreal [1918] A.C. 626) which relate in some way to the credit or creditworthiness of a person. The

Act does not cover, e.g. a representation as to the availability of a quantity of sugar for sale (Diamond

v Bank of London & Montreal Ltd [1979] 1 Lloyd’s Rep. 335 at 338 and 340).

The signature of an agent of an individual will not satisfy the section (Swift v Jewbury and Goddard

L.R. 9 Q.B. 301; UBAF Ltd. v European American Banking Corporation [1984] 1 Q.B. 713), nor will the

signature of a non-signing partner be sufficient against his co-partner (Williams v Mason (1873) 28 L.T.

232). However, a representation signed on behalf of a limited company by its duly authorised agent

acting within the scope of his authority constitutes the company’s signature for the purposes of the

section (UBAF Ltd v European American Banking Corporation [1984] 1 Q.B. 713).

Frauds by agents. The fraud alleged in the pleading must be the fraud of the defendant, and not of a

third person (Staffordshire Financial Co v Hill (1909) 53 S.J. 446). In addition to the servant or agent,

who will be personally responsible for his own fraud (Weir v Bell (1878) 3 Ex. D. 238 at 248; Eaglesfield

v Marquess of Londonderry (1876) 4 Ch.D. 693 at 708), a master of principal will be liable for the wrong

of his servant or agent if the wrong is committed in the case of a servant in the course of his

employment, and in the case of an agent in the course of his actual or ostensible authority. If the

agent made the misrepresentation innocently without the knowledge of the principal (i.e. that was in

fact no fraud or dishonesty on the part of the principal ), then the principal will not be liable on a claim

in deceit even if the principal knew the facts which made the representation false: see Armstrong v

Strain [1952] 1 K.B. 232. In order for the master or principal to be liable, all the features of the wrong

which are necessary to make the employee liable have to have occurred in the course of the

employment. If the acts of the servant which have occurred in the course of the employment do not

in themselves amount to a tort but only amount to a tort when linked to other acts which were not

performed in the course of the employee’s employment (whether the other activities are performed

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by the same person or a different person, who may or may not have a fellow employee) the master

or principal will not be liable (Lloyd v Grace, Smith & Co [1912] A.C. 716; Generale Bank Nederland NV

v Export Credits Guarantee Department [1999] 2 W.L.R. 540, HL). The claimant should have altered

his position to his detriment in reliance on the belief that the servant’s activities were part of his job

(Armages v Mundogas (The Ocean Frost) [1986] A.C. 717 at 781).

The fact that a company director makes a fraudulent misrepresentation on behalf of a company and

that is relied on as being on behalf of that company is irrelevant to the personal liability of that

director. Unlike in negligent misrepresentation no personal assumption of liability by the director

needs to be pleaded or proven. Lord Hoffman stated in the Standard Chartered case at para. 22

(overturning the findings of the Court of Appeal on this issue):

“No one can escape liability for his fraud by saying: ‘I wish to make it clear that I am committing

this fraud on behalf of someone else and I am not to be personally liable’.”

Once all the necessary elements of the tort of fraudulent misrepresentation are established against a

director he will be liable for the loss that the claimant incurred as a consequence. For cases applying

this principle of Standard Chartered see for example Abu Dhabi Investment Co v H Clarkson and Co Ltd

[2007] EWHC 1267, where the quote from Lord Hoffmann above was referred to by Mr Justice

Tomlinson as “the by now hallowed words” (at paragraph 4 of the judgment), and the decision of the

Court of Appeal of Contex Drouzhba Ltd v Wiseman [2008] 1 B.C.L.C. 631.

A third party dealing with a fraudulent agent may be liable to the principal if he ought to have known

that the agent was exceeding his authority (Reckitt v Barnett [1929] A.C. 176).

The knowledge of a subordinate employee or agent of the falsity of the representations fixes a

corporate defendant with vicarious liability as principal where the representations were made with

the actual or ostensible authority of the defendant. Primary liability of the defendant may be alleged

where the individuals constituting the “directing will and mind” of the corporate entity knew (or were

reckless as to) the falsity of the representations that were innocently made on the company’s behalf

by other, more subordinate employees or agents. For a discussion of the pleading of the two different

allegations, see Enron (Trace) Exploration and Production BV v Clapp (No.2) [2005] EWHC 401 upheld

by the CA – Clapp v Enron (Thrace) Exploration and Provisions BV [2006] 1 C.L.C. 94.

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On the attribution to a company of the knowledge of its agent for the purposes of s.213 of the

Insolvency Act 1986 (liability for fraudulent trading), see Bank of India v Christopher Morris [2005]

B.C.C. 739.

Deceit as a defence to an action on a contract. A contract procured by fraud is voidable at the election

of the party defrauded. But it remains valid until he has duly disaffirmed it (Deposit Life Assurance Co

v Ayscough (1856) 6 E.&B. 761; Oakes v Turquand (1867) L.R. 2 H.L. 325; referred to in Reese River Co

v Smith (1869) L.R. 4 H.L. 64) the effect of a rescission for fraud is that “the contract is treated in law

as never having come into existence” (Johnson v Agnew [1980] A.C. 367 at 393, per Lord Wilberforce).

The defence should explicitly plead that the defendant has duly disaffirmed the contract (see Dawes

v Harness (1875) L.R. 10 C.P. 166). The right to disaffirm must be exercised without unreasonably

delay after the discovery of the fraud, and while the parties remain in, or can be restored to, their

original position (Gordon v Street [1899] 2 Q.B. 641 at 649; Lake v Simmons [1927] A.C. 501; Spence v

Crawford [1939] 3 All E.R. 288).

Unreasonable delay is strong evidence that the defrauded party has elected to affirm the contract.

Where a party alleges that the remedy is lost by delay he must show when the Claimant had sufficient

knowledge of the facts constituting the title to relief and that he was aware of his right to elect to

rescind or affirm (Peyman v Lanjani [1985] Ch. 457). If the position of the parties has been changed,

the party seeking to disaffirm the contract must be able to show that he has in effect restored the

original state of things or taken all necessary steps for that purpose (Deposit Life Assurance Co v

Ayscough, above; Urquhart v Macpherson (1878) 3 App. Cas. 831). In many cases, however, the right

of disaffirming the contract will be subject to rights acquired by innocent third parties through or

under the contract, before any disaffirmance of it (Clough v London & North Western Ry (1871) L.R. 7

Exch. 26, applied in Kwei Tek Chao v British Traders and Shippers [1954] 2 Q.B. 459.

Jurisdiction. When a fraudulent misrepresentation is made by letter, message sent by word-of-mouth,

telephone or telex, fraud is committed at the place where the message is received (Diamond v Bank

of London & Montreal Ltd [1979] 1 Lloyd’s Rep. 335 at 337). However, it should be noted that for the

purposes of CPR 6.20(8)(b) in order to found jurisdiction for a claim in tort, damage must be sustained

as a result of “an act committed within the jurisdiction”. The relevant “act” is the misrepresentation

and the place where the act is committed ( or “the harmful event occurred”) is the place where the

misrepresentation was made rather than where it was received (see Domicrest Limited v Swiss Bank

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Corporation [1999] Q.B. 548, Rix J and Newsat Holdings Ltd v Zani [2006] 1 Lloyd’s Rep 707, David Steel

J. ).

Deceit is a common law tort giving rise to a claim for damages. Fraudulent misrepresentation is a part

of the law of contract. Both have in common relief for reliance on a false statement made dishonestly.

The tort of deceit is a cause of action the essence of which is the making of a false statement

dishonestly, causing loss to another who relies upon that statement.

That loss can be recovered as damages.

Fraudulent misrepresentation in the law of contract gives a person who has been induced to enter

into a contract as a result of a false statement made dishonestly the right to avoid and rescind that

contract.

Avoidance of a contract is optional: a party who has been the victim of a misrepresentation inducing

a contract (which need not be fraudulent) may elect to avoid the contract and no longer be bound by

it.

Rescission of contract is a remedy entitling a victim of a misrepresentation to recover payments made

under a contract and otherwise be placed in the position in which he, she or it would have been had

the contract never been entered into.

A victim of a fraudulent misrepresentation is entitled to the remedy of rescission as of right; for other

types of rescission, it is a remedy at the discretion of the court.

The tort of deceit and the equity of fraudulent misrepresentation ought not to be confused with the

tort of fraud, which is a tort of bribery: see Clerk & Lindsell on Torts 20th Ed. Incorporating Second

Cumulative Supplement Main Volume; Ch.18 - Deceit at 18-55 for details.

There is a special statutory equivalent of the tort of deceit in relation to the property s.183 of the LPA

1925 (fraudulent concealment of documents and falsification of pedigrees), but which is different in

some material respects from the common law tort.

Elements of the tort of deceit: A claimant bringing a claim for deceit must show:

- that the defendant made to the claimant a clear representation of present fact or law;

- that the representation was in fact false;

- that the defendant made that representation knowing it to be false or not believing it to be

true;

- that the defendant made the representation with the intention that the claimant rely upon it;

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- that the claimant in fact relied upon the representation; and

- that the reliance caused loss to the claimant.

With one statutory exception, no particular form of representation is required: a representation

might be made orally, in writing or by conduct, and may be express or implied. Mere silence will

not suffice (Bradford Third Equitable Benefit Building Society v Borders [1940] Ch.202) unless

there is a fiduciary duty which requires the defendant to reveal the relevant information (Conlon

v Simms [2006] EWHC 401 (Ch); [2006] 2 All E.R. 1024), but active concealment can amount to

representation by conduct, and half-truths can amount to an implied representation (Peek v

Gurney (1873) L.R. 6 H.L. 377). The position is different in relation to the statutory tort of

fraudulent concealment in conveyancing, discussed below. The statutory exception is Statute of

Frauds Amendment Act 1828 s.6, which limits liability in deceit for a representation made relating

to the character, conduct, credit ability, trade or dealings of a third person where the intent or

purpose of that representation be that the third person obtain money or goods on credit on the

strength of it: such deceits are actionable only if they are signed and in writing. This section does

not apply to actions for breach of contract (Banbury v Bank of Montreal [1918] A.C. 626) or actions

in the tort of negligent misstatement (WB Anderson & Sons Ltd v Rhodes (Liverpool) Ltd [1967] 2

All E.R. 850).

The representation must be one of present fact or law; a representation as to the future will not

suffice (British Airways Board v Taylor [1975] 1 W.L.R. 1197) nor will a promise (Becket v Cohen

[1972] 1 W.L.R. 1593) Contract law is more apt to deal with the enforcement of promises.

However, it is possible for statements of what will transpire in the future to contain implied

representations about present facts, and such representations will be actionable. A statement of

opinion is a representation that the person making the statement genuinely holds the opinion

(Anderson v Pacific Fire & Marine Insurance Co (1871-72) L.R. 7 C.P. 65), but not that it is true: AIC

Ltd v ITS Testing Services (UK) Ltd (The Kriti Palm) [2006] EWCA Civ 1601; [2007] 1 All E.R. (Comm)

667; a statement of law is treated as a statement of opinion for these purposes (ibid). The

representation must be clear: The Kitri Palm (supra).

The representation must be false. A statement is false if it is substantially incorrect such as might

have induced a person to act differently in reliance on it than had the statement been true: Avon

Insurance Plc v Swire Fraser Ltd [2000] 1 All E.R. (Comm) 573. When considering whether an

implicit representation is false, what the court must consider is what a reasonable person would

have inferred was being implicitly represented by the representor's words and conduct in their

context, which is a fact sensitive exercise: Mellor v Partridge [2013] EWCA Civ 477.

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The representation must be fraudulent. A representation is fraudulent when the person making it

knows it to be false or does not believe it to be true: Derry v Peek (1889) 14 App. Cas. 337.

Negligence - even gross negligence - will not suffice: a claimant wishing to rely on negligence will

instead have to make out the different requirements of the tort of negligence as applied to

misstatements: The Kitri Palm (supra). It matters not whether or not the motive was reprehensible

or benign (Standard Chartered Bank v Pakistan National Shipping Corp (No.2) [2002] UKHL 43;

[2003] 1 A.C. 959): fraud is made out if and only if there is knowledge of falsehood or no belief in

the truth of a statement. Fraud may also be made out where a person makes a true statement,

but fails to communicate to the person to whom it is made that the statement has subsequently

become false: Brownlie v Campbell (1880) 5 App. Cas. 925; however, representation by way of

implied representation or partial concealment are only fraudulent if the person making them

intended to give a false impression: Gross v Lewis Hillman Ltd [1970] Ch. 445. In Foster v Action

Aviation Ltd [2014] EWCA Civ 1368, the Court of Appeal held that the dictum of Lord Halisbury, L.

C. in the case of Arnison v Smith (1889) 41 Ch. D. 348 in terms that, "A deliberate statement was

made and the defendants cannot be heard to say that they did not know the popular meaning of

the words they used" cannot stand with the decision in Derry v. Peek, in which the maker of the

statement must know it to be false or not believe it to be true in order for it to be fraudulent.

The defendant must have intended that the claimant rely on the representation: Tackey v Mcbain

[1912] A.C. 186. "Intention" for these purposes requires either desire that the claimant act upon

the representation or knowledge that the claimant will do so: Shinhan Bank Ltd v Sea Containers

Ltd [2000] 2 Lloyd's Rep. 406. It is immaterial that there is no intention that the claimant acts in a

particular way: Goose v Wilson Sandford & Co (No.2) [2001] Lloyd's Rep. P.N. 189; it will suffice if

there is intention that the claimant place some reliance on the statement. The representation

need not be made directly to the claimant provided that it is made with the intention that the

claimant rely on it, and it will suffice if the representation is made with the intention of being

communicated to a class of persons of whom the claimant is one, or to the public generally: Swift

v Jewsbury (1872-73) L.R. 8 Q.B. 244.

The claimant must have relied on the representation: the representation must have caused the

claimant (or a machine such as a computer under his control) to act otherwise than he or she

would have done had it not been made Smith v Chadwick (1884) 9 App. Cas. 187. It may not suffice

if the claimant has suffered loss as a result of a reliance by a third party:Larkins v Chelmer Holdings

[1965] Qd. R. 68 (an Australian case). It is sufficient if the representation is a substantial

contribution to the claimant's actions, and need not be the sole cause: Parabola Investments Ltd

v Browallia Cal Ltd (formerly Union Cal Ltd) [2009] EWHC 901 (Comm); [2009] 2 All E.R. (Comm)

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589. Reliance need not take the form of believing the representation to be true provided that the

representation had a real influence upon the representee, such as a belief that there is a risk that

a third party, such as a court, might believe it to be true with significant consequences for the

representee: Hayward v Zurich Insurance Co Plc [2016] UKSC 48; [2016] 3 W.L.R. 637 (Supreme

Court).

The claimant's reliance must have caused loss. Deceit is not actionable per se: proof of loss is

necessary to make out the cause of action: Smith v Chadwick (1884) 9 App. Cas. 187. Where the

claimant can show that he or she has expended money in consequence of reliance on the

defendant's deceit, there is a rebuttable presumption that this expenditure is loss to the claimant:

Parallel Imports (Europe) Ltd (t/a Baglan Car Centre) v Radivan [2007] EWCA Civ 1373. See below

on remedy for the measure of damages.

Vicarious liability for deceit: A person may be vicariously liable for the deceit of an employee (Lloyd

v Grace Smith & Co [1912] A.C. 716), agent (Briess v Woolley [1954] A.C. 333) or fellow partner in

a partnership (Partnership Act 1890, s.10) even if the employer, principal or co-partner is wholly

innocent of any dishonesty. The usual principles of vicarious liability apply, with the modifications

set out below. See also Bowstead & Reynolds on Agency 19th Ed. Ch.8 - Relations Between

Principals and Third Parties.

Unlike for other torts, where an employer is vicariously liable for all torts committed by employees

in the course of their employment, the liability of an employer for deceit is limited to where the

employee had actual or ostensible authority to make the representation that founds the claim:

Lloyd v Grace Smith & Co [1912] A.C. 716.

In cases of agency, principals are in any event liable only to the extent to which the tort was

committed by the agent within her or his actual or ostensible authority.

Principals who themselves are the intended victims of the agent's fraud are not vicariously liable

to other such victims: Kwei Tek Chao (t/a Zung Fu Co) v British Traders & Shippers Ltd [1954] 2

Q.B. 459.

For a co-partner to be liable, the tort must be committed in the course of the partnership business

(Dubai Aluminium Co Ltd v Salaam [2002] UKHL 48; [2003] 2 A.C. 366), and the representation

must concern a matter which a reasonable person might think was part of the firm's ordinary

business: JJ Coughlan Ltd v Ruparelia [2003] EWCA Civ 1057; [2004] P.N.L.R. 4.

Defences: With limited exceptions set out below, the only defence to a claim for deceit is that one

or more of the elements outlined above are not made out.

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It is no defence that the claimant was careless or foolish in accepting the truth of the defendant's

representation, even if contradictory material is readily available to the claimant: Venezuela

Central Railway Co v Kisch (1867) L.R. 2 H.L. 99

Contributory negligence is not available as a defence to deceit: Standard Chartered Bank v

Pakistan National Shipping Corp (No.2) [2002] UKHL 43; [2003] 1 A.C. 959.

An exclusion clause or notice of any sort is ineffective to exclude liability for deceit, as a matter of

public policy: HIH Casualty & General Insurance Ltd v Chase Manhattan Bank [2003] UKHL 6;

[2003] 1 All E.R. (Comm) 349. However, this principle does not apply to vicarious liability: those

who might be vicariously liable for the deceit of others can, subject to the limitations generally

applicable to exclusion clauses, exclude that vicarious liability: Frans Maas (UK) Ltd v Samsung

Electronics (UK) Ltd [2004] EWHC 1502 (Comm); [2005] 2 All E.R. (Comm) 783.

However, one possible defence to an action for deceit is that the claimant's loss flows from

dealings which are intrinsically illegal: in other words, damages cannot put the claimant into a

position in which he or she would only have been by virtue of her or his own illegal conduct:

Thackwell v Barclays Bank Plc [1986] 1 All E.R. 676. Because this defence is one of public policy, its

application is fact sensitive. It may not be a defence if the claimant's conduct is not so clearly

reprehensible so as to justify condemnation of the court, nor if the conduct is not so much part of

the claim against the defendant so as to justify refusing any remedy to the claimant (Standard

Chartered Bank v Pakistan National Shipping Corp).

Fraudulent misrepresentation in equity and contract: Fraudulent misrepresentation is a subset of

misrepresentation generally, as to which, see Formation of contract: misrepresentation and

duress for an outline and Chitty on Contracts 31st Ed. Volume 1 - General Principles; Pt 2 -

Formation of Contract; Ch.6 - Misrepresentation for details.

The elements of fraudulent misrepresentation are much the same as those of the tort of deceit,

with the following modifications:

- the reliance that the claimant must demonstrate is inducement to enter into a contract; and

- the claimant need not show loss, as such.

In some cases, a statement amounting to a misrepresentation can also become a term of a

contract entitling a party to sue for breach: see Contract law for an overview and Chitty on

Contracts 31st Ed. Volume 1 - General Principles; Pt 2 - Formation of Contract; Ch.6 -

Misrepresentation for details.

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The most important distinction between fraudulent misrepresentation and deceit is in the remedy

available, as to which see below on remedies.

Before the passage of the Misrepresentation Act 1967, misrepresentation was divided into two

categories: fraudulent and innocent. Fraudulent misrepresentation was a common law doctrine

and innocent misrepresentation an equitable doctrine. Rescission and/or avoidance of contract

was the only remedy for innocent misrepresentation. A victim of fraudulent misrepresentation

would in addition be able to claim damages in the tort of deceit. The 1967 Act provided a

discretion as to whether to grant rescission or the new remedy provided for by that Act of

damages in lieu of rescission. It further provided for damages in addition to rescission where the

representor (defendant) cannot show that he or she had "good cause" to make the false

representation (often termed "negligent misrepresentation"). However, s.2 of that Act excluded

fraudulent misrepresentation from its scope. The result is that a claimant for fraudulent

misrepresentation is still entitled to rescind the contract as of right, as well as claim damages in

the tort of deceit, but the court is not entitled to award damages in lieu of rescission.

Although required for innocent or negligent misrepresentation (Pan Atlantic Insurance Co Ltd v

Pine Top Insurance Co Ltd [1995] 1 A.C. 501), a claimant in a case of fraudulent misrepresentation

need not show that, but for the misrepresentation, he or she would not have entered the contract:

it will suffice that the misrepresentation had some impact on her or his thinking: Edgington v

Fitzmaurice (1885) 29 Ch. D. 459. A claim to rescind a contract for fraudulent misrepresentation

might therefore lie where a claim for damages for negligent misrepresentation or in lieu of

rescission would not. Because fraudulent misrepresentation is excluded from the scope of the

1967 Act, a claimant cannot in such a case invite the court to award damages in lieu of rescission.

Fraudulent concealment and falsification of pedigrees: Section 183 of the Law of Property Act

1925 provides a special statutory regime for certain types of fraud in conveyancing. It is similar to

the tort of deceit, but with some modifications.

In order to make out a claim for fraudulent concealment, the claimant must show:

that the claimant is a purchaser for money or money's worth of property (s.183(1)) or a person

whose right over property is concealed from a purchaser of it (s.183(2)(b));

that the defendant is the person disposing of that property, or the solicitor or other agent of that

person (ibid);

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that the defendant either: (i) conceals from the purchaser any instrument or incumbrance

material to the title (s.183(1)(a)) or; (ii) falsifies the pedigree upon which the title may depend in

order to induce the purchaser to accept the title offered or produced (ibid);

that the defendant by so doing intended to defraud (s.183(1) and District Bank Ltd v Luigi Grill Ltd

[1943] Ch. 78); and

that the claimant has as a result suffered loss (s.183(2)).

The Act also makes this a specific criminal offence (s.183(1)). In a case where the defendant vendor

or solicitor has made a false statement dishonestly about a pedigree upon which a title may

depend and the purchaser relies on that statement causing loss, the Act is identical in effect to

the common law tort of deceit. However, it is wider in two material respects: firstly, a false

statement is not required: mere concealment will suffice. Secondly, it is not only a person to whom

a false statement has been made who may bring an action, but a third party whose right over the

property in question has been the subject of a false representation, provided that that person can

show loss.

What constitutes "fraudulent" is not explicitly defined and there are no reported cases deciding

the point. It is suggested that the most likely interpretation is that concealment is made with

intent to defraud where the defendant knows of the instrument or incumbrance concealed and

intends or is reckless as to whether the purchaser will assume or believe that no such instrument

or incumbrance exists and that the purchaser will place at least some reliance on this assumption

or belief in making the purchase. It is further suggested that falsification of a pedigree is made

with intent to defraud where the person so falsifying knows the pedigree adverted to the

purchaser to be false or does not believe it to be true. Both of these formulations are adaptations

or applications by analogy of the rule in Derry v Peek (1889) 14 App. Cas. 337.

It is unlikely that this tort will in modern times arise often in the conveyancing of land for which it

appears to have been designed because most land is now registered and interests are therefore

more difficult to conceal. There is nothing in s.183 that limits this tort to real property: any

"property" would appear to suffice, including choses in action or chattels, although the point does

not appear to have been tested. It might well be relevant, however, to fraudulent concealment of

overriding interests.

Remedies - damages: The remedy for the tort of deceit is damages.

The measure of damages in deceit is the loss incurred by the claimant's reliance upon the false

statement: damages are intended to put the claimant into the position in which he, she or it would

16

have been had the statement not been made or had the claimant not relied upon it, but not the

position in which the claimant would have been had the statement been true: Doyle v Olby

(Ironmongers) Ltd [1969] 2 Q.B. 158. Damages to compensate the claimant for the statement not

being true are recoverable only if the statement has become the term of a contract.

Losses representing opportunity cost (the loss of chance of making a profit by using money

expended in consequence of the deceit in more fruitful ventures) are recoverable as damages

where the claimant can specifically prove this loss: East v Maurer [1991] 1 W.L.R. 461. However,

the defendant cannot reduce the claimant's damages based on actual expenditure by showing

that it is likely that the claimant would have expended the same money in an unprofitable venture

and lost it in any event: Slough Estates Plc v Welwyn Hatfield DC [1996] 2 P.L.R. 50.

There is no restriction in principle to the type of damages that can be recovered: all consequential

losses are recoverable provided that the claimant can prove causation. Damages for personal

injury may be recovered in an action for deceit: Banks v Cox (No.2) (2000), Chancery Division;

likewise damages for distress (Saunders v Edwards [1987] 1 W.L.R. 1116) and inconvenience (Mafo

v Adams [1970] 1 Q.B. 548), although non-pecuniary damages for such things are likely to be

modest.

Aggravated damages may be awarded to compensate the claimant for injury to feelings arising

out of the defendant's deceit in a sufficiently egregious case: Archer v Brown [1985] Q.B. 401.

Exemplary damages are (probably) available in deceit where the deceit was committed by a public

authority or was calculated to make a profit in excess of any damages that might be recovered:

Kuddus v Chief Constable of Leicestershire [2001] UKHL 29; [2002] 2 A.C. 122.

There is no rule that damages for deceit need to be foreseeable: Doyle v Olby (Ironmongers) Ltd

[1969] 2 Q.B. 158.

The claimant is required to give credit for any benefit obtained by virtue of reliance on the false

statement: Smith New Court Securities Ltd v Citibank NA [1997] A.C. 254.

The rules of mitigation of loss apply equally to damages for deceit as for any other claim for

damages: Smith New Court Securities Ltd v Citibank NA [1997] A.C. 254.

In a claim for fraudulent concealment, where the claimant is a purchaser of the property and that

property or an interest in it is recovered from the purchaser by the third party whose rights over

the property were concealed, the court must have regard when estimating the damages to any

expenditure in the improvement of any land by the claimant (Law of Property Act 1925 s.183). It

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is likely that the remainder of the rules on the assessment of damages are identical to those

relating to the tort of deceit, although this does not appear to have been tested.

Remedies - rescission and avoidance: The principal remedies for misrepresentations inducing a

contract, including fraudulent misrepresentations, are the rescission of that contract and the

innocent party's right to avoid it.

A party to a contract which has not yet been executed (performed) who has been induced to enter

that contract by a misrepresentation (of any sort) by the other contracting party can elect to avoid

it. A party who elects to avoid it is no longer bound to perform her, his or its obligations under the

contract. The right of avoidance must be communicated to the other contracting party and

exercised promptly; the contract remains valid until its avoidance is communicated to the other

contracting party, so an innocent third party might acquire good title to goods transferred by such

a contract: Phillips v Brooks Ltd [1919] 2 K.B. 243.

Where a contract has been wholly or partly executed, the victim of a misrepresentation may

rescind it. In a case of fraudulent misrepresentation, the court has no discretion to award damages

in lieu of rescission: Misrepresentation Act 1967 s.2.

Rescission reverses the contract ab initio (retrospectively): Johnson v Agnew [1980] A.C. 367. All

payments made and/or goods transferred under the contract can be recovered (title to goods

automatically revests: Car & Universal Finance Co Ltd v Caldwell [1965] 1 Q.B. 525 unless formality,

such as land registration, is required, when the guilty party will hold the property on constructive

trust for the innocent party: see Megarry & Wade: The Law of Real Property 8th Ed. Ch.11 at 11-

021, and the parties are treated as if they had never entered into the contract in the first place,

including acting as a defence to proceedings brought on the contract: Clough v London & North

Western Railway Co (1871-72) L.R. 7 Ex. 26.

Rescission is bilateral: the innocent party must equally return property acquired under the

contract, and if this is no longer possible, rescission is not available: Clarke v Dickson 120 E.R. 463

(1858). Rescission by the innocent party need not be "precise" so long as it is substantial (Smith

New Court Securities Ltd v Citibank NA [1997] A.C. 254) and rescission may be possible where the

guilty party has part performed services (Atlantic Lines & Navigation Co Inc v Hallam Ltd (The Lucy)

[1983] 1 Lloyd's Rep. 188), albeit in that case the innocent party must make allowances for the

services received. The rule on the possibility of rescission is applied more liberally in cases of

fraudulent misrepresentation, however: Spence v Crawford [1939] 3 All E.R. 271.

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Clauses affecting secondary obligations, such as arbitration, choice of law and governing

jurisdiction, generally survive rescission: Cunningham-Reid v Buchanan-Jardine [1988] 1 W.L.R.

678 (on arbitration's interaction with rescission specifically, see also now Arbitration Act 1996 s.7).

In cases of fraudulent misrepresentation, the fact of fraud can usually provide a ground for the

court refusing to exercise its discretion to order specific performance, which is a discretionary

remedy, unless there has been affirmation, even when the right to rescind has otherwise been

lost: Geest Plc v Fyffes Plc [1999] 1 All E.R. (Comm) 672.

Rescission usually requires notice to the other contracting party to take effect, but this rule is

disapplied where it is not possible to give such notice, at least where the reason for the

impossibility is the guilty party's deliberate act of disappearing or hiding: Car & Universal Finance

Co Ltd v Caldwell [1965] 1 Q.B. 525 (in that case, notice to the A. A. and the police was held to

suffice where the fraudster had disappeared).

No order of the court is required for there to be a valid rescission once communication has taken

place (Abram Steamship Co Ltd (In Liquidation) v Westville Shipping Co Ltd (In Liquidation) [1923]

A.C. 773), although of course a court can in an appropriate case grant a declaration that a contract

has (or has not) been rescinded.

If the innocent party, having discovered the misrepresentation, nevertheless expressly avows her

or his intention to continue with the contract, or acts in a way consistent only with such

continuance, then the contract is said to be affirmed, and the innocent party loses the right to

rescind: Clough v London & North Western Railway Co (1871-72) L.R. 7 Ex. 26.

In the case of innocent misrepresentation, mere lapse of time can be sufficient to be a bar to

rescission even when the representee is unaware of the falsity of the representation (Leaf v

International Galleries [1950] 2 K.B. 86), but this rule does not apply to fraudulent

misrepresentation:MacKenzie v Royal Bank of Canada [1934] A.C. 468.

Enforcement and bankruptcy: A bankrupt is not released from debts incurred in respect of fraud

or fraudulent breach of trust by the discharge of bankruptcy: Insolvency Act 1986 s.281(3).

This has the effect that a judgment debt arising out of a claim for fraud (such as a claim in the tort

of deceit) is always enforceable against a defendant, no matter how many times that he or she

might have been made bankrupt in the intervening time (subject to the six year limitation period

on enforcement of judgments), although the section is not limited to judgment debts. Given the

doctrine of merger, however, a judgment debt will not arise out of fraud unless the cause of action

on which the judgment was founded is one entailing fraud, such as the tort of deceit, which is a

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potentially significant advantage to a claimant of bringing an action based on fraud rather than or

in addition to actions not so based.

"Fraud" is given a strict interpretation such that causes of action that involve arguable

reprehensible behaviour (such as undue influence) short of a cause of action of which dishonesty

is an essential element will not suffice: Masters v Leaver [2000] I.L.Pr. 387.

Forbearance in respect of a debt procured by fraud will also render that debt one from which a

bankrupt is not released by virtue of discharge from bankruptcy: Insolvency Act 1986 s.281(3).

This is apt to cover a situation in which an indebted person dishonestly makes a false

representation with the intention and effect of causing a creditor not to take steps to enforce that

debt at a time before the person becomes bankrupt. In this case, the debt itself need not arise out

of fraud.

A claimant who wishes to enforce a judgment debt in respect of or bring a claim for deceit or other

type of fraud against a discharged bankrupt may do so just as he or she would with a person who

never had been made bankrupt. However, a claimant proceeding against an undischarged

bankrupt will need the permission of the court, albeit that permission is likely to be granted in a

case of fraud: Polly Peck International Plc v Nadir Times, November 11, 1991. In such a case, the

creditor must give credit for any dividend received in the bankruptcy.

Procedural aspects: A claimant alleging fraud (in its wider sense of a claim founded on dishonesty,

such as deceit or fraudulent misrepresentation, rather than the narrower sense of the tort of fraud

in the sense of bribery) must specifically set out such an allegation in particulars of claim: CPR

PD16 para.8.2(1). This extends to defences asserting fraud (such as allegations of malingering

made by a defendant in a personal injury case): Cooper v P&O Stena Line Ltd [1999] 1 Lloyd's Rep.

734. In that case, concerned with an allegation of malingering, it was suggested that it might have

been appropriate to have pleaded such fraud in a counter-schedule of loss.

Legal professionals have particular duties relating to making allegations of fraud: members of the

Bar, for example, must not plead fraud unless there is a prima facie case and specific instructions

to do so, and a similar rule applies to solicitors. It is not necessary, however, that such a prima

facie case be based on evidence which would be admissible at a trial.

The standard of proof in any civil proceedings where fraud is alleged is not altered from the normal

civil standard of the balance of probabilities, but, because of the gravity of an allegation of fraud,

courts are less willing to find that such an allegation has been shown to be probable than a less

20

grave allegation, such as negligence: Hornal v Neuberger Products [1957] 1 Q.B. 247. This is based

on what is said to be the lower inherent likelihood of fraud than less serious matters.

Cases brought in the High Court are considered more likely to be suitable for trial in the Royal

Courts of Justice as opposed to a district registry of the High Court if they are fraud claims: CPR

PD29 para.2.6(3). (A number of other sorts of claims are also listed in that paragraph).

In claims tried in the County Court or Queen's Bench Division of the High Court where there is in

issue a "charge of fraud against any person", the court is obliged to order that the trial be by jury

if an application by any party is made within 28 days of the service of the defence (CPR r.26.11)

and unless "the court is of opinion that the trial requires any prolonged examination of documents

or accounts or any scientific or local investigation which cannot conveniently be made with a jury":

Section 69 of the Senior Courts Act 1981 and the County Courts Act 1984 s.66 respectively. A

"charge of fraud" here means a claim in which dishonesty is an essential element of the cause of

action: Barclays Bank Ltd v Cole (No.1) [1967] 2 Q.B. 738: in that case it was held that a civil claim

in respect of a robbery (where the cause of action was conversion, not requiring proof of dishonest

as an essential element) would not suffice. The respective statutes provide a discretion to permit

trial by jury in any other case in the Queen's Bench Division or County Courts, although this is

rarely exercised.

An action lies to set aside judgments procured by fraud: Barrell Enterprises, Re [1973] 1 W.L.R. 19.

This is capable of applying to decisions on appeal as well as at first instance: Taylor v Lawrence

[2001] EWCA Civ 119. It is, however, a narrow exception to the important general principle of

finality of litigation, and is thus strictly confined to cases where the fraud and resulting injustice

are clearly made out. A slightly more liberal version of the principle applies to consent orders

procured by misrepresentation: Dietz v Lennig Chemicals Ltd [1969] 1 A.C. 170: in such cases, the

consent order can be set aside where the agreement underlying it would be susceptible to

rescission for misrepresentation. Similarly, a settlement agreement compromising proceedings

may be rescinded for fraudulent misrepresentation, and it is immaterial that the innocent party

did not personally believe the false statement to be true provided that he, she or it was induced

to act by it (for example, by a belief that there was a risk that the court would accept it as true):

(or any) misrepresentation only by way of believing it to be true (Hayward v Zurich Insurance Co

Plc [2015] EWCA Civ 327).

In matrimonial proceedings, a consent order procured by fraud or fraudulent non-disclosure can

be set aside by an application in the existing proceedings to a judge of the same level and neither

fresh proceedings nor an appeal are necessary: Gohil v Gohil [2015] UKSC 61. Where a consent

21

order requires the positive approval by the court, such as in matrimonial proceedings or where

one or more of the parties is a child or a protected party, the court must re-open the case fully in

any event, and no proof is required at the stage of the application to re-open that the court would

have reached a different conclusion had it known the truth: Sharland v Sharland [2015] UKSC 60.

Where an allegation of fraud is made unnecessarily or the person raising it loses on the issue, even

if the person making the allegation is ultimately successful at trial on other grounds, the court will

usually order the person unsuccessfully or unnecessarily making the allegation of fraud to pay the

other party's costs of doing so: National Westminster Bank Plc v Kotonou (Costs) [2006] EWHC

1785 (Ch); (2006) 150 S.J.L.B. 1288. Whether it is "necessary" to make an allegation of fraud,

however, ought to be considered in the light of the position on bankruptcy above.

It ought to be noted that there are a number of rules and precedents relating to the exercise of

discretion in costs where a party has behaved dishonestly in the proceedings themselves, but such

matters are outside the scope of this article. Specialist works on costs or procedure ought to be

consulted.

The rules relating to limitation are modified when the action is based on the fraud of the

defendant such that time runs from the date on which the claimant did or could with reasonable

diligence have discovered the fraud: Limitation Act 1980 s.32. The same applies where the

defendant deliberately conceals facts relevant to the claimant's right of action from the claimant

(ibid). This does not affect the limitation period applicable to innocent third parties who have

acquired property to which the claimant has a claim: ibid.