Misrepresentation and Fraud

Learning Outcome:
After completion of the lesson students will be able to -
a) comprehend the nature of misrepresentation in contracts
b) distinguish between representation and promise
c) describe the elements of misrepresentation
d) describe the elements of fraud
e) distinguish between misrepresentation and fraud

1. Vitiating Elements in Contract: Misrepresentation and Fraud Preeti Kana Sikder Assistant Professor Department of Law & Justice Jahangirnagar University

2. The process of contractual negotiation A duty to not make any false statements of fact or law to the other contracting party, and thereby to induce him to enter into the contract

3. What is Representation in a contract?

4. Kleinwort Benson Ltd v Malaysia Mining Corp Berhad (1989) The difficulty of distinguishing between promise and representation

5. The letter of comfort was a contractual promise according to Judge Hirst J, whereas the Court of Appeal held that it was a representation of fact. Representation A statement of fact which induces the other party to enter in to a contract or otherwise act to his detriment Promise A statement that creates an expectation that the promise will be fulfilled and the promisor accepts (or is deemed to accept) an obligation to carry out his promise.

6. Understanding Misrepresentation A misrepresentation may be defined as an unambiguous, false statement of fact or law, which is addressed to the party misled, which is material and which induces the contract

7. Distinct elements of the definition

8. Rules relating to Misrepresentation Deal with the effect of special factors on account of which the law may refuse to enforce agreements which would, apart from such factors, be binding.

9. Misrepresentation of Law

10. Misrepresentation regarding Statement of Fact A statement can be made by conduct as well as by words. Such statement must also be one of ‘existing’ fact. Three categories of statements have been held not to constitute statements of existing fact and therefore can not amount to actionable misrepresentations: Mere puff A statement of opinion or belief which proves to be unfounded A statement of intention

11. Vague commendatory statement In Dimmock v Hallett (1866), Lord Justice Turner said that a representation that land was ‘fertile and improveable’ would not be considered to be such a misrepresentation that entitles the innocent party to rescind the contract. However, the more specific the statement, the less likely it is to be treated as a mere puff Carlil v Carbolic Smoke Ball Co (1893)

12. Statement of Opinion or Belief In Bisset v Wilkinson (1927) a vendor of a farm, which had not been used for sheep farming before, represented to a prospective purchaser that, in his judgment, the land could carry 2000 sheep. When the purchaser discovered that the farm could not carry 2000 sheep, he sought to set aside the contract on the ground of vendor’s misrepresentation but failed.

13. Esso Petroleum Ltd v Mardon (1976) Esso represented to a prospective tenant of a petrol filling station, that the throughput of petrol at the station was likely to reach 200,000 gallons per year.

14. Statement of Intention Edgington v Fitzmaurice (1885) Directors of a company invited the public to subscribe for debentures on the basis that the money so raised would be used to expand the business. In fact, the real purpose in raising the money was to pay off company debts.

15. Addressed to the party misled Direct communication to the claimant Addressed by the representor to a third party with the intention that it be passed on to the claimant

16. Commercial Banking Co. of Sydney v RH Brown and Co. (1972) The defendants were held to be liable to the claimants due to their misrepresentation because they knew that the claimants’ bank did not want the information for their own purposes. Rather, the info was to be passed on to a customer who was proposing to deal with a client of the defendant bank

17. Inducement According to Black’s Law Dictionary: A Reasonable Person is an ordinary person who exercises care while avoiding extremes of boldness and carefulness. 

18. Inducement: The Orthodox Position If the misrepresentation would have induced a reasonable person The onus of proof is placed on the representator to show that the representee did not in fact rely on the representation

19. Inducement in Misrepresentation Where the misrepresentation would NOT have induced a reasonable person The onus of proof is placed on the representee to show that the misrepresentation did in fact induce him to enter into the contract

20. The misrepresentation need not be the sole inducement; it is sufficient that it was an inducement which was actively present to the representee’s mind Edgington v Fitzmaurice (1885)

21. Situation where claimant would be unable to prove inducement Where claimant was unaware of the representation When claimant knew that the representation was untrue Where claimant did not allow the representation to affect his judgment

22. JEB Fasteners v Marks, Bloom and Co (1983) and Atwood v Small (1838) Home Work

23. Atwood v Small (1884) Atwood contracted to sell his mine to Small but exaggerated its earning capacity. Small appointed agents to verify Atwood’s representations and they reported that Atwood was telling the truth. After the contract was concluded, Small discovered exaggerations. He sought to rescind the contract.

24. JEB Fasteners v Marks, Bloom and Co (1983) The defendants negligently prepared accounts of a company which was made available to the claimants. The claimants, despite having reservations about those accounts, decided to proceed with the take-over because they wished to acquire services of the two directors of the company. The court decided that the defendant’s representation did not play a ‘real and substantial’ part in inducing the claimants.

25. S. 18: Misrepresentation defined Misrepresentation means and includes: - the positive assertion, in a manner not warranted by the information of the person making it , of that which is not true , though he believes it to be true; any breach of duty which, without an intent to deceive, gains an advantage to the person committing it, or any one claiming under him, by misleading another to his prejudice or to the prejudice of any one claiming under him; causing, however innocently, a party to an agreement to make a mistake as to the substance of the thing which is the subject of the agreement.

26. S. 17 : Fraud defined Fraud means and includes any of the following acts committed by a party to a contract, or with his connivance ( willingness to be involved in a secret immoral act ), or by his agent, with intent to deceive another party thereto or his agent, or to induce him to enter into the contract:- the suggestion, as a fact, of that which is not true, by one who does not believe it to be true; the active concealment of a fact by one having knowledge or belief of the fact;

27. S. 17 : Fraud defined (3) a promise made without any intention of performing it; (4) any other act fitted to deceive; (5) any such act or omission as the law specially declares to be fraudulent. Explanation– Mere silence as to facts likely to affect the willingness of a person to enter into a contract is not fraud, unless the circumstances of the case are such that, regard being had to them, it is the duty of the person keeping silence to speak, or unless his silence is, in itself, equivalent to speech.

28. Illustrations (a) A sells, by auction, to B, a horse which A knows to be unsound. A says nothing to B about the horse's unsoundness. This is not fraud in A. (b) B is A's daughter and has just come of age. Here, the relation between the parties would make it A's duty to tell B if the horse is unsound. (c) B says to A-"If you do not deny it, I shall assume that the horse is sound." A says nothing. Here, A's silence is equivalent to speech. (d) A and B, being traders, enter upon a contract. A has private information of a change in prices which would affect B's willingness to proceed with the contract. A is not bound to inform B.

29. Psychological Element of Fraud The intention to deceive distinguishes Fraud from Misrepresentation

30. Substantial Elements of Fraud A suggestion made, as to a fact, which is not true, by one who does not believe it to be true. Active concealment of a fact by one who has the knowledge or belief of the tact. Active concealment must be distinguished from a passive concealment.

31. Substantial Elements of Fraud Whether a promise was made without any intention to perform must be proved based on the circumstances. As it is never possible to mention all types of fraud, law widens its scope to include all sorts of activities fitted to deceive The declaration of law can be found in legislations. For example, S. 55 of Transfer of Property Act 1882 requires the seller of an immovable property to disclose to the buyer any material defect relating to such property. If no such disclosure is made willingly, it becomes a fraud.

32. What is the difference between Misrepresentation and Fraud?

33. Thank You