Fraud consists in leading a man into damage by wilfully or recklessly causing him to believe and act on a falsehood. If a falsehood be knowingly told, with an intention that another person should believe it to be true, and act upon it, and that person has acted upon it, and thereby suffered damage, the party telling the falsehood is responsible in damages in an action for deceit there being a conjunction of wrong and loss, entitling the injured party to compensation.1) Fraud, in the contemplation of a civil Court of justice, may be said to include properly all acts, omissions and concealments which involve a breach of legal or equitable duty, trust, or confidence, justly reposed, and are injurious to another, or by which an undue or unconscientious advantage is taken of another. All surprise, trick, cunning, dissembling, and other unfair way that is used to cheat any one is considered as fraud. Fraud in all cases implies a wilful act on the part of any one, whereby another is sought to be deprived, by illegal or inequitable means, of what he is entitled to.2)
In the leading case of Derry v. Peek , Lord Herschell said:
In my opinion making a false statement through want of 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 though on insufficient grounds.3)
Thus, to create a right of action for deceit there must be a fraudulent representation; and a representation in order to be fraudulent must be one
There must be an active attempt to deceive by a statement which is 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 gave so much for it; the first is an opinion which the buyer may adopt if he will, the second is an assertion of fact which, if false to the knowledge of the seller is also fraudulent.
A suppression of the truth (suppressio veri) may amount to a suggestion of falsehood (suggestio falsi). Concealment of this kind is sometimes called, “active”, “aggressive,” or “industrious,” but perhaps the word itself, as opposed to nondisclosure, suggests the active element of deceit which constitutes fraudulent misrepresentation. There must be such a partial and fragmentary statement of fact, as that the withholding of that which is not stated makes that which is stated absolutely false.
Mere silence with regard to a material fact will not give right of a action:
Non-disclosure when there is no duty to disclose is not fraud.7)
Defendant liable: The plaintiff was dealing in cochineal, and at the time when the cause of action arose had a large stock on hand which he was, anxious to dispose of. The defendant learning 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, well knowing he was not of the sort. On the faith of this representation the plaintiff gave to Falch 16 bags of cochineal of the value of nearly £3,000, on credit. Upon the bill becoming due it turned out that Falch was insolvent, 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 extent he had suffered in consequence of the former's false statement as to the credit and character of Falch.8) The defendant sold a cow, fraudulently representing that it was free from infectious disease, and the plaintiff having placed the cow with five others, they caught the disease and died. It was held that the plaintiff was held entitled to recover as damages the value of all the cows, as their death was the natural consequence of his acting on the faith of the defendant's representation.9) 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 of deceit lay;10) so, too, where a ship was sold with “ all fault ” and the vendor knowing of a latent defect concealed it and made a fraudulent statement as to its condition.11)
Defendant not liable: Defendant sent to a public market pigs which were to his knowledge suffering from typhoid fever, and to send them to market in this state was a breach of a penal statute. Plaintiff bought the pigs with “ all faults,” no representation being made as to their condition. The greater number died : other pigs belonging to plaintiffs were also infected. It was contended that the exposure of the pigs in the market amounted to a representation under the circumstances, that they were free from any contagious disease. It was held that no action lay ; to say that every man is always to be taken to represent in his dealings with other men, that he is nod to his knowledge violating any statute, is a refinement which would not appear reasonable to any man.12) The plaintiff sued for damages arising from the defendant's fraud in letting to the plaintiff a house for a term of years which he knew to be required for immediate occupation, without disclosing that it was in a ruinous condition; it was held that no such action will lie.13)
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 gives no right of action to the party injured by it.
The defendant is not liable if he has forgotten the truth.20)
The motive of the person saying that which he knows not to be true to another with the intention to lead him to act on the faith of the statement is immaterial.21)
Defendant liable: Where 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 dishonoured; it was held that, an action for deceit lay against the defendant by an endorsee for value. Absence of dishonest motive is no defence.22) Where the defendant in answer to the plaintiff's letter asking him if he could recommend a man named T as a safe and responsible tenant, had “ much pleasure in replying affirmatively ” though he knew T to be a man of no resources, and that he had more than once failed in business similar to the one he now wished to enter into, it was held that it was of no consequence that what the defendant had said he said out of mere kindness and had no idea of making anything out of it, or even of deliberately deceiving the plaintiff. The defendant was not allowed to excuse himself by showing that he had nothing to gain by making the false representation.23)
Defendant not liable: The prospectus of a tramway company stated that the company had power to use steam. In fact it had not; and the directors of the company knew it had not, but they believed that the power to use steam could be, and would be, obtained without difficulty and could not be refused. In this, however, they were mistaken. The House of Lords decided that an action for damages would not lie against a person for an untrue statement made by him, unless he was guilty of fraud; and that he was not guilty of fraud if he honestly believed the statement to be substantially true though he might have no reasonable ground for his belief, and might have been guilty of some carelessness in making the statement.24) Owing to this decision of the House of Lords, the Director's Liability Act was passed. Where a telegraph company by a mistake in the transmission of a message, caused the plaintiff to ship to England large quantities of barley which were not required, and which owing to a fall in the market, resulted in a heavy loss; it was held that the representation not being false to the knowledge of the company, gave no right of action to the plaintiff.25) The defendant sold to the plaintiff a stone, which he affirmed to be Bezour stone, but which proved not to be so. It was held that no action lay against him unless he either knew that it was not Bezour stone, or had warranted it to be Bezour stone.26)
Leading cases: Derry v. Peek; Chandelor v. Lopus.
It is necessary that the misrepresentation should have been made in relation to the transaction in question, and with the direct intent to induce the party to whom it is immediately made, or a third party, to act in the way that occasions the injury.27) Whether the representation is made to the plaintiff, or to a third party, is immaterial, if it is false to the knowledge of the defendant, and has been made for the purpose of being communicated to the plaintiff;28) or to a class of persons 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 of the public or of such class, acts on it.29)
Where the defendant sold a gun to the father of the plaintiff, for the use of himself and his sons representing that the gun was made by a well-known maker and safe to use, and a son used 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 for the deceit.30) A vendor of a lamp represented the lamp to be fit and proper to be used, knowing that it was not, and intending it to be used by the plaintiff's wife, the wife, joining her husband for conformity, was held entitled to an action for deceit, upon the principle that if any one knowingly told a falsehood with intent to induce another to do an act which resulted in his loss, he was liable to that person in an action for deceit.31)
The plaintiff sent to the defendant some samples of printed handkerchiefs with a view to obtain orders from him. The defendant told him that the design he had printed was a registered one, and that the owner of it was going to proceed against him for an injunction. The plaintiff, in consequence, was put to considerable expense in proceeding to London to make inquiries. The statement was false. Another element of damage was that the defendant, having delayed the plaintiff's manufacture, made use of the design himself, and obtained the command of the market which the plaintiff would otherwise have had for his wares. There was an averment that the defendant knew the statement was false, and that he knowingly and wilfully uttered it ; it was held that the plaintiff had stated a good cause of action.32) If a train which has been taken off is announced as still running in the current time-table of a railway company, this is false representation and a person who by relying on it has missed an appointment and incurred loss may have an action for deceit.33) Where a director of a company puts forth. transferable shares into the market, and publishes and circulates false statements and representation for the purpose of selling the shares, the false representation is deemed in law to be made to all persons who read the public announcements, and become purchasers of shares on the faith of the statements contained in them.34) 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 expense in examining the property. The defendant knew at the time he inserted the advertisement that he had Dot the power to let the farm, and that it was not to be let. It was held that this amounted to a false representation. It was a false statement knowingly made and published in order to be read by persons who would be likely to be tenants of farms, and the natural consequence would be that a person who was desirous of becoming a tenant would, upon reading the advertisement, incur expense in looking at the farm, and this, it is alleged is what the plaintiff did.35)
A prospectus for an intended company contained misrepresentation of facts known to the directors who issued it. Being addressed to the whole public, any one might take up the prospectus and appropriate to himself its representations, by applying for an allotment of shares. 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 market, was not so connected with the prospectus as to render those who had issued it liable to indemnify him against the losses which he had suffered in consequence.36)
But where a prospectus is issued not merely for the purpose of inviting persons to subscribe to shares, but also in order to induce persons to purchase the shares of the company in the open market, the office of the prospectus is not exhausted upon the allotment of shares; and a person who having received a prospectus, afterwards purchases shares in the open market relying upon false representations contained in such prospectus, has a cause of action against the promoters in respect of such false representations.37)
The plaintiff must show that he was deceived by the fraudulent statement and acted upon it to his prejudice.38)
Fraud without damage, or damage without fraud, gives no cause of action; but where these two concur, an action lies. Damage is a part of the cause of action. There is no action for a naked lie.39) It is enough if the fraudulent representation operates to the prejudice of a man to a very small extent. But to give a cause of action the damage must be the immediate and not the remote effect of the representation.40) Misrepresentation which does not itself cause damage, but is merely incidental to some lawful act which does cause damage, is not actionable.41)
The fact that the party deceived had the means at hand of finding out the truth is immaterial, if he makes no actual independent inquiry.42) A mere perfunctory inquiry on the part of the party deceived is not sufficient.43) But to escape liability the defendant may prove that the other party:
Where one fraudulently misrepresents the amount of his business, and the person to whom such representation is made, acting on the faith thereof, purchases it and is damnified, an action of deceit will lie against the vendor.44) But a mere careless statement as to the percentage of profits on capital, made honestly, but untrue in point of fact by reason of the defendant having omitted to include trade buildings in his compensation of capital, has been held to give no right of action.45) Where the defendant sold a cannon to the plaintiff, having concealed a defect in it, and the plaintiff never inspected the cannon, which, owing to the defect, burst on being used, it was held that the defendant was not liable, as plaintiff never inspected the cannon and was not deceived by the attempted fraud.46)
A false representation may be such as to amount to, or to be in the nature of, a guarantee. By the fourth section of the Statute of Frauds, a promise to answer for the debt, default, or miscarriage of another must be in writing and signed. The object of this provision was, however, practically evaded by a number of cases, notably Paseley v. Freeman, which were framed in tort instead of in contract.
In consequence of this Lord Tenterden's Act, was passed, requiring every eulogy of another's conduct, credit, ability, etc, made with the object of inducing trust of such person, to be in writing and signed by the party to be charged therewith, before an action for false representation would lie. According to the better opinion, only statements really going to the assurance of personal credit are within the statute.47) But Lord Tenterden's Act is now superseded to a certain extent by rule of evidence laid down by the Judicature Act.
Wherever a man wickedly asserts that which he knows to be false, and thereby draws his neighbour into a heavy loss is responsible for it or for so much of the loss as was the necessary, natural, or probable known consequences of the misrepresentation.48) All who profit more or less by a fraud, and all who aid and abet it, as well as those whose directly commit it, are all liable in damages.
Where the plaintiff had been induced by the fraud of the defendant to take up shares which were really worthless, he was held entitled to recover the full amount he had paid for them, although they had a market value at the time he took them.49)
Indian cases: Where the plaintiff's property had been fraudulently transferred, it was held that he was entitled to recover the damage for loss, which he sustained on account of such fraudulent transfer from the actual transferrer, and from the person who was found to have been the prime mover and instigator in the transaction, as well as from his own agent who consented to such transfer, and the purchaser who, being aware of circumstances sufficient to create suspicion, dealt with persons who had no authority to sell.50) In a suit for loss resulting from untrue representation damages are arrived at by considering the difference in the position the plaintiff would have been in had the representation been true and the position he actually is in in consequence of its being untrue.51)
The fraud of 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
The principal knows the representation to be false:
The principal thinks the representation to be true.
Thus, we find that the principal is liable in all possible, cases except when both he and his agent believe the latter's misrepresentation to be the truth.
Principal liable: The plaintiff, having for sometime, on a guarantee of 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 gave him a written guarantee, to the effect that the customer's cheque on the bank in plaintiff's favour, 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 to the amount of £12,000, 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. The Government money, amounting to £2,676, was received by D and paid into the bank; but D's cheque for the price of the oats drawn on the bank in favour of the plaintiff was dishonoured by the defendants, who claimed to detain the whole sum of £2,676 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 unavailing and fraudulently concealed from the plaintiff the fact which would make it so ; and (2) that the defendants would be liable for such fraud.57)
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 a 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 not recover from the bank the amount so paid. In an action of deceit, whether against a person or against a company, the fraud of the agent may be treated, for the purpose of pleading, as that of the principal.58) One of several partners in a patent induced the plaintiff, by false and fraudulent representations, to pay £3,000 for part of the profits to be obtained by its working, all the partners were held liable to repay the money, although there was no evidence of fraud on the part of more than one.59) One of several solicitors connived at a fraud committed by a client of the firm in obtaining money out of the Court of Chancery. The money was received by the one partner under a power of attorney, and was handed over to the client. The other partners were entirely innocent, and were in fact, ignorant of the transaction. It was. held that they were jointly and severally liable to make good the money to those whom it really belonged.60)
Two persons were in partnership as solicitors. A client entrusted one of them with money to invest on mortgage, and was told by him that it was so invested; whereas, in truth, the partner who had received the money had misapplied it. For many years the client was regularly paid interest by the solicitor who attended to the matter, and the fraud was not discovered until he became a bankrupt. The other partner, who knew nothing whatever of the fraud, was nevertheless held liable to make good the money.61)
In Fountleroy forgery cases, Fountleroy 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 out the stock under the forged powers of attorney remitted the proceeds of the sale to the credit of Marsh & Co., with Martin, Stone & Co. Fauntleroy then drew out these monies by a cheque signed by him in the name of his firm, and applied them to his own use. The firm of Marsh & Co. was, however, held liable for them, although none of the partners except Fauntleroy had any hand in his forgeries or frauds, or in fact knew anything of what had taken place.62)
Where a coal-merchant conspired with the agent of a purchaser to charge the purchaser a higher price than he (the coal-merchant) was willing to sell at, the difference being paid to the agent by way of a bribe, it was held that an action for fraud lay against the coal-merchant.63)
Principal not liable: Where the secretary of the company by false statements induced persons to take shares, it was held that the company was not liable; for it is no part of the duty of a secretary of a company to make representations to persons to induce them to become shareholders;64) here as the agent makes a fraudulent statement outside the general scope of his employment, the principal will not be liable. One of several solicitors was entrusted with money for the purpose of investing it on mortgage, when good opportunity offered, but he misapplied it. Held, that his co-partner was not liable, inasmuch as there was no evidence to show that it was part of the business either of the firm in question or of solicitors generally to act as scriveners, i.e., as depositaries of money waiting for investment.65)
If directors of public companies authorize the publication and circulation of prospectuses and advertisements concerning the affairs of the company, containing statements, with their signatures annexed thereto, which are false to the knowledge of the directors, and which the directors, from their position and means of knowledge, may fairly be taken to warrant as true, they will be responsible in damages to parties who have taken shares, and invested money in the company, on the faith of these prospectuses, and have sustained damage in consequence thereof.66) When the company has adopted these representations there may be an action against the company also, but not against an individual shareholder who has not signed the report.67) Where the company is in the truth the principal, and the directors mere intermediate agents, then in the absence of personal fraud, individual directors are not liable for the fraudulent acts of agents.68)
Mere trifling errors, or overpraise of the prospects of a company, will not amount to a deceptive statement.69) In an advertisement some allowance must always be made for the sanguine expectations of the promoters of the adventure, and no prudent men will accept the prospectuses which are always held out by the originators of every new scheme, without considerable abatement.70)
Where the object with which the prospectus of a company is issued is not merely to induce application for allotment of shares, but also to induce persons to whom it is seat to purchase shares in the market, its function is not exhausted when company has gone to allotment, and the person issuing the prospectus is responsible for the consequences of a false representation contained in it, and known to him at the time to be false, to any person to whom: the prospectus has been sent, and who is induced by the false representation to purchase shares and thereby sustains a loss. In this case Peek v. Gurney was distinguished, Where a person who has issued. the prospectus of a company containing a false representation known to him at the time to be false, subsequently causes to be published a false representation to the same effect as that of the prospectus with the direct intent of inducing persons to purchase shares in the company, he is responsible for the consequence of so doing to any one who having received a prospectus purchases shares on the faith of the false representation so published and thereby sustains a loss.71)
Damages: In actions against directors of a company for deceit in inducing the plaintiff to purchase shares, the proper mode of measuring damages is to ascertain the difference between the purchase money paid and what would have been a fair price to be paid for the shares, according to the true circumstances of the company at the time of the purchase.72) The question is what was the real value in fact ; if the shares had any market value, or if the plaintiff had sold them, that must be allowed for; but if they had no real value, then the measure is the price paid for them, and no allowance is to be made for a mere delusive value on the stock-exchange due in fact to the fraud of the directors.73)
A seller is liable to an action for deceit if he fraudulently misrepresents the quality of the thing sold to be other than it is in some particulars which the buyer has not equal means with himself of knowing; or if he do so in such a manner as to induce the buyer to forbear from making the inquiries which for his own security and advantage he would otherwise have made.74) There may be a custom in a trade for the seller to disclose particular defects at the time of sale, if he knows of them; and then he will be liable if he omits to do so.75) And generally, if a seller knows of material latent defects affecting the value of the goods, but offers them at the ordinary price, knowing that the buyer is grossly deluded by their appearance, he will be liable in damages for wilful deceit.76) But patent defects, discoverable by ordinary inquiry need not be disclosed; but then no art or contrivance must be resorted to in order to conceal such defects.77)
Damages: When the deceit was in regard to a sale of chattels, the rules for assessing value in actions for breach of warranty may be consulted, it being always remembered that the presence of fraud justifies more readily a presumption as to value against a wrong-doer, than where there is liability, but without fraud; and any special damage, the legal and natural consequence of the fraud, may be added to the deficiency in the value of the chattels. Where the defendant fraudulently sold to the plaintiff an infected cow as sound, and five other cows of the plaintiff became infected and died, the plaintiff recovered the value of all the cows.78)