§ 3. Fraud.

In dealing with the subject of Fraud, we must endeavour Fraud,

to confine ourselves to a few very simple and general rules,

lest we should be led into a discussion beyond the scope of

this treatise, and perhaps of ethical rather than legal signi-

ficance. It is idle to attempt to fr^me a definition of Fraud

which should cover every aspect of so multiform a concep-

tion; nevertheless we may put together in a set of words

what may be considered to be the essential charia.cteristics of

Fraud such as will give rise to the action of deceit.

Fraud is a false representation of fact, made with a know- Its essential

ledge of its falsehood, or in reckless disregard whether it be ^ "^^*

true or false, with the intention that it should be acted upon

by the complaining party, and actually inducing him to act

upon it.

Let us consider these characteristics in detail.

Fraud is a false representation. There must

be a repre-

It differs in this respect from non-disdomre such as may f f ^^^°'^'

^ '' false in

vitiate a contract iwerrimaejldei; there must be some active itself,

attempt to deceive either by a statement which is false, or °r ^™'-.u

by a representation, true so far as it goes, but accompanied suppression

with such a suppression of &cts as makes it convey a mis- ^ ^

leading impression. Concealment of this kind is sometimes

called 'active/ 'aggressive,' or 'industrious;' but perhaps

the word itself, as opposed to non-disclosure, suggests the

active element of deceit which constitutes fraudulent mis-

representation. And the distinction between the misrepre-

sentation by non-disclosure, which has no legal consequences

except in the case of contimcts uberrimae fideiy and the mis-

represtotation which would give rise to an action of deceit,

is most clearly pointed out by Lord Cairns in the case of

Peek V, Gv/mey. 'Mere non-disclosure of material facts, l. r. 6 h. l.

however morally censurable, however that non-disclosure

146 FORMATION OP CONTRACT. Part 11.

might be a ground in a proper proceeding at a proper time

for setting (mde an allotment or a purcTiase of shares, would,

in my opinion, form no ground for an action in the nature

of an action for misrepresentation. There must, in my

opinion, be some active misstatement of fact, or, at all

events, 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,*

Non-disclo- Disclosure then is not in the case of ordinary contracts

sui*c IS not

fraud ; incumbent on the parties. A vendor is under no liability to

communicate the existence even of latent defects in his wares

unless by act or implication he represents such defects not

L.R.3Q.B.D. to exist. In the case of Ward v. Hobbs, the defendant sent

150, on AppeaL

nl^'urfo™ 13, *o * public market pigs which were to his knowledge

'^^^ Buffering from a contagious disease, and his sending them

Contagious to the market was a breach of 32 & 33 Vict. c. 78. s. 57.

Diseases

(Animals) "^be plaintiff bought the pigs, no representation being made

^^^' as to their condition. The greater number died : other pigs

belonging to the plaintiff were also infected, and so were the

stubble-fields in which they were turned out to run. It was

urged that the exposure of the pigs in the market amounted

to a representation, under the circumstances, that they were

free of any contagious disease. Cotton, L. J., in his judg-

ment said, ' What is relied upon here as a representation is

this : that the defendant, knowing the pigs had an infectious

disease, sent them to market. Is that evidence on which a

jury could find, properly, that the defendant represented that

the pigs had not, to his knowledge, any infectious disease 1 *

And the Court held, overruling the judgment of the Court

of Queen's Bench, that it was not.

tioc. B. S9X. So too in the case of Keates v. Lord Gadogan, where the

plaintiff sued for damages arising from the defendant's fraud

in letting to the plaintiff a house ^ which he knew to be

* The house was leased for a term of years. The law is otherwise

where a furnished house is hired for a short period, as for instance the

Chap. IV. § 3. FRAUD. I47

required for immediate occupation, without disclosing that

it was in a ruinous condition, it was held that no such

action would lie.

* It is not pretended/ said Jervis, C. J,, * that there was

any warranty, expressed or implied, that the house was fit

for immediate occupation : hut, it is said, that, because the

defendant knew that the plaintiff wanted it for immediate

occupation, and knew that it was in an unfit and dangerous

state, and did not disclose that fact to the plaintiff, an action

of deceit will lie. The declaration does not allege that the

defendant made any misrepresentation, or that he had reason

to suppose that the plaintiff would not do, what any man in

his senses would do, viz, make proper investigation, and

satisfy himself as to the condition of the house before he

entered upon the occupation of it. There is nothing amount-

ing to deceit.'

The representation must be a representation of fact.

It is hardly necessary to repeat what was said on the nor expres-

subject of misrepresentation, that a mere expression of opinion ;

opinion, which turns out to be unfounded, will not invali-

date a contract ; but a good illustration of the contrast

between opinion and representation may be found in the

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 \nll : Harvey v.

the second is an assertion of fact which, if false to the know- "indsay Petro-

ledge of the seller, is also fraudulent. hI^.^l: r.

A . . « . . , 5 p. C. at p.

Agam, an expression of mtention does not amount to a ^^

statement of fact, nor does a promise, and we must distin- sion of in-

guish a representation that a thing is, from a promise that ^®"^^<^"-

L. R. I c. b.'

552.

London season. In such a case immediate occupation is of the essence

of the contract; and if the house is uninhabitable the lessee is dis-

charged, not on the ground of fraud, but because ' he is offered some- wiison v. .

thing substantially different from that which was contracted for.' 2"r?""h"°d

li a 336. •

148 FORMATION OF CONTRACT. Part II.

a thing shall be. Yet, though the intentiQii expressed in

a promise cannot usuallj be regarded as a statement of facts,

we must note that there is a distinction between a promise

which the promisor intends to perform, and one which the

promisor intends to break. In the first case he represents

truly enough his intention that something i^all take place

in the future: in the second case he misrepresents his ex-

isting intention ; he not merely makes a promise which is

ultimately broken, but when he makes it he represents his

state of mind to be something other than it really is. And

In ex parte SO it has bceu laid down thdt if a man buy troods, not

Whittaker. JO "^

L.^R. 10 ch. intending to pay for them, he makes a fraudulent misrepre-

sentation.

Again, it is said that misrepresentation of law does not

give rise to the action of deceit, nor even make a contract

voidable as against the person making the statement. There

is little direct authority upon the subject, but it may be

L.^R. 2H. L, submitted that the distinction drawn in Cooper v. Fhihbs as

to the difference between ignorance of general rules of law

and ignorance of the existence of a right would apply to the

case of a fraudulent misrepresentation of law, and that if a

man's rights were concealed or misstated knowingly, he

might sue the person who made the statement, for deceit.

HirscMeid v. It sccms clear, from a late strong expression of opinion in

BrightoA, and the Qucen's Bench Division, that a fraudulent representation

South Coast ^ .

Rauway Co., ^f ^]^q effcct of a dccd can be relied on as a defence in an

L.R.«Q. aD,

JC.

action upon the deed.

The representation must be made with knowledge of its

fcdsefiood or in reckless disregard of its truth.

There must Unless this is so, a representation which is false gives no

ledge of right of action to the party injured by it. Thus where a

falsehood ; Telegraph Company, by a mistake in the transmission of a

Dickson v. t t 1 » »rt* t • -i-itii

Reute^s^Teie- messagc, caused the plamtiff to ship to England large quan-

1. k.3c.p.D. ^j[^eg Qf i^arlcy which were not required, and which, owing to

Chap. IV. § 3- FBAX7D. 149

a fall in the market, resulted in a heavy loss, it was held

that the representation, not being fidse to the knowledge of

the Company, gave no right of action to the plaintiff ' The

general rule of law,' said Bramwell, L. J., ' is clear that no

action is maintainable for a mere statement, although untrue,

and although acted upon to the damage of the person to

whom it is made, unless that statement is fahe to the know-

ledge of the person making it' And this rule is to be

qufdified, or rather supplemented, by the words of Lord

Cairns in the JSeese Eiver Mining Comjpamy v. Smith, ' that

if persons take upon themselves to make assertions as to or disregard

which they are ignorant, whether they are true or not, they

must, in a civil point of view, be held as responsible as if

they had asserted that which they knew to be untrue.' l.^^"

•^ . at p. 79-

Therefore if a man makes a false representation in ignorance

of its fidsehood he is not liable as for fraud, unless in the

case of such recklessness of statement as would suggest

malajldes.

The enunciation of the law on the subject by Bramwell,

L. J^ is so clear and decisive that it is not necessary to go

into a series of conflicting decisions between the years 1832

and 1844, in some of which it was laid down that a false

statement made in good £uth amounted to ' fraud in law ^.' ^

' The term ' firaud in law/ or legal as opposed to moral fraud, seems

DOW to be finally condemned. It had a meaning so long as some

judges were disposed to hold, as Lord Denman held in Evans v. Collins, 5 q. b. m.

that the author of a misstatement which caused loss to the plaintiff,

'though charged neither with fraud nor with negligence, must have

been guilty of some fatdtwhen he made a £Edse representation.' But

since that decision was reversed by the Court of Exchequer Chamber, 5 Q- b. sso. and

on the express ground that a statement made honestly and in a full huiS^^'ni. &

belief of its troth could afford no cause of action, the term legal frattd ^- ^

has ceased to mean anything. Its final condemnation is to be found

in the judgment of Bramwell, L. J., in the case of Weir v. BeU, in l. r. sEx. d.

which, after saying that to make a man liable for fraud, moral fraud '*^

must be proved against him, he adds, ' I do not understand legal fraud.

To my mind it has no more meaning than legal heat or legal cold,

legal light or legal shade. There never can be a well-founded complaint

of legal fraud or of anything else except where some duty is shewn,

and correlative right and some violation of that duty and right, and

409.

150 FORMATION OF CONTRACT. Part II.

It is now settled that a statement made with a honA fde

belief in its truth cannot be treated as fraudulent ; but the

reckless assertions spoken of by Lord Cairns are on the border

line, which it is hard to draw accurately between truth and

falsehood. There may well be occasions in the course of

business when a man is tempted to assert for his own ends

that which he wishes to be true, which he does not know

to be false, but which he strongly suspects to have no founda-

tion in fact. Such statements cannot be regarded as bond

fide, and the maker of them must be held responsible if they

turn out to be false,

though the But there is another aspect of fraud in which the fraudu-

motive need , . , , , ^ i • i

not be frau- lent intent is absent but the statement made is known to be

uent. untrue. Such is the case of Polhill v, Walter cited above.

See ante,

p. 130. ^jj^j ^jjg decision in that case is practically confirmed by the

J^g^ ""'■ "■ ^ judgment of Lord Cairns in the case of Peek v. Gwmey. The

plaintiff in that case had purchased shares from an original

allottee on the faith of a prospectus issued by the directors

of a Company, and he brought an action of deceit against the

directors. Lord Cairns in his judgment compared the state-

ments in the prospectus with the facts of the condition of

the Company at the time they were made, and came to the

conclusion that the statements were not justified by the facts

of the case. He tlien proceeded to point out that though

these statements were false, yet the directors might well have

thought, and probably did think, that the undertaking would

be a profitable one. * But,' he says, ' in a civil proceeding

of this kind all that your Lordships have to examine is the

question. Was there or was there not misrepresentation in

point of fact? And if there was, however innocent the

motive may have been, your Lordships will be obliged to

arrive at the consequences which would properly result from

when these exist it is much better that they should be stated and

acted on, than that recourse should be had to a phrase illogical,

and unmeaning, with the consequent uncertainty.*

Chap. IV. § 3. FRAUD. 151

what was done.' And the reason for such a rule of law is

obvious : if a man chooses to assert what he knows or even

suspects W be false, hoping or even believing that all will

turn out well, he cannot be permitted to urge upon the in-

jured party the excellence of the motives with which he did

him a wrong, but must submit to the natural inferences and

results which follow upon his conduct.

The representation must be made with the intention that

it should be acted upon by the injured party.

We may divide this proposition into two parts. Firstly,

the representation need not be made to the injured party ;

but, secondly, it must be made with the intention that he

should act upon it.

In Langridge v. Levy, the defendant sold a gun to the 2 m. & w. 519.

father of the plaintiff for the use of himself and his sons, The state-

ment need

representing that the gun had been made by Nock and was not be made

' a good, safe, and secure gun :' the plaintiff used the gun ; it jured^rJai^ty.

exploded, and so injured his hand that amputation became

necessary. He sued the defendant for the false representa-

tion, and the jury found that the gun was unsafe, was not

made by Nock, and found generally for the plaintiff. It

was urged, in arrest of judgment, that the defendant could

not be liable to the plaintiff for a representation not made

to him ; but the Court of Exchequer held that, inasmuch as

the gun was sold to the father to be used by his sons, and

the false representation made in order to effect the sale, and

as ' there was fraud and damage, the result of that fraud,

not from an act remote and consequential, but one contem-

plated by the defendant at the time as one of its results,

the party guilty of the fraud is responsible to the party

injured.'

But the limitation of this liability is marked by Wood,

V. C, in Barry v. Croskey. * Every man must be held liable a j. & h. i.

for the consequences of a false representation made by him

L. R. vi H. L.

377-

1^2 FORMATION OF CONTRACT. Part II.

but must be tp euqiotibuer apon which a third person acts, and so acting is

theinten- injured or damnified, provided it appear that such false

lion that he representation was made with the intent that it should be

should act

upon it. acted upon by such third person in the manner that occasions

the injury or loss. But to bring it within the principle, the

injury, I apprehend, must be the immediate and not the

remote consequence of the representation thus made/ There-

fore in Peek v, Gwmey, a body of directors who would have

been liable to original allottees of shares for false statements

contained in the prospectus of the*Company, were held not

to be liable to persons who subsequently purchased shares

which came into the market, on the ground that their inten-

tion to deceive could not be supposed to extend beyond the

first applicants for shares. So soon as these had been

p. 410. allotted Hhe prospectus had done its work: it was ex-

hausted.'

The representation must actually deceive.

Deceit Th\& would Seem to be clear enough, and there is direct

which does authority for the proposition. In HorsfaU v. Thomas, the

is not plain tifif sued the defendant upon a bill of exchange accepted

AT& c ^y ^^^ ^^ payment for a cannon which he had bought of the

plaintiff. The cannon had a defect which made it worthless,

and the plaintiff had endeavoured to conceal this defect by

the insertion of a metal plug into the weak spot in the gun.

The defendant never inspected the gun ; he accepted it^ and

upon using it for the purpose for which he bought it the gun

burst. It was held that the attempted fraud having had no

operation upon the mind of the defendant did not exonerate

him from paying for the gun. ' If the plug, which it was

said was put in to conceal the defect, had never been there,

perBramweii. his positiou would havc bccu the same; for, as he did not

B., I H. & C.

^ee dicta of ®^^^^® *h® g^^ ^^ ^^^^^ ^^7 opiniou as to whether it was

c.^T.^^S'smith sound, its condition did not affect him.' This judgment has

L r"?'q!'b. been severely criticised by high authority, but it is submitted

Ch»p. JV. § 3. FRAUD. 153

that it is founded in reason. Deceit which does not affect

conduct can hardly create liabilities ; and it would seem as

reasonable to defend an action brought for the price of goods

on the ground that the seller was a man of immoral character,

as to maintain that a contract was voidable by reason of a

deceit practised by one party which in no way affected the

judgment of the other.

We are now in a position to consider what is the effect Effects of

of Fraudy such as we have described it to be, upon rights

ex contractu.

We may observe, in passing, that the person injured by

Fraud such as we have described has the action at Common

Law for deceit, and may recover by that means such damage

as he has sustained ; and there is authority for saying that

Courts of Equity will similarly grant relief from misrepre-

sentation or fraud by compelling: the defendant to make £COod sum v.

•^ '^ . ® Croucher,

the loss sustained by the plaintiff. These remedies are not « d- f. & J-

•^ -^ pp. 523. 5B4-

confined to cases of Fraud by one of two contracting parties

upon the other, but to any fraudulent statement which leads

the person to whom it is made to alter his position for the

worse.

But we are concerned with rights arising ex contractu, and

have to consider the particular remedies in respect of affirma-

tion or avoidance of the contract which are open to the

injured person when he discovers the fraud; and the rules

with regard to these matters may be shortly stated thus : —

(i) He may affirm the contract and ask to have the repre- Right to

sentations by which he was induced to enter into it made

good so far as may be possible. The principles upon which

his claim to the exercise of this equitable right depends are

thus laid down in the case of PuUford v. Richards : * The ^7 Beav. 95.

distinction between the cases where the person deceived is at

liberty to avoid the contract, ox where the Court will affirm

154

rORMATION OF CONTRACT.

Part 11.

it, giving him compensation only, are not very clearly defined.

The question usually arises on the specific performance of

contracts for the sale of property; and the principle which

I apprehend governs the cases, although it is in practice

of very difficult application, and leads to refined distinctions,

is the following, viz. that if the representation be one that

can be made good, the party to the contract shall be

compelled, or may be at liberty to do so ; but if the re-

presentation made be one which cannot be made good, the

person deceived shall be at liberty, if he please, to avoid the

contract.'

But if the contract be affirmed, the affirmation brings with

it all the liabilities of the contract, and the fraud can no

longer be set up as a ground of relief.

Right to

rescind.

(2) He may avoid the contract, and so may

(a) resist an action brought upon it at Common

Law;

(0) resist specific performance when sought in

Equity ;

(•y) obtain a judicial avoidance of the contract in

Equity.

Limits of

right to

rescind.

Clouffh V.

London &

N. W. R. Co.,

L. R. 7 Ex. 3S

(3) His right to avoid the contract is limited in certain

ways. It is true that a man may keep the contract open till

he is sued upon it, and that a plea of fraud then set up is a

sufficient rescission of the contract ; but so long as he keeps

it open he does so at his own risk. His right to avoid it

may be determined either by his accepting some benefi^t

under the contract, or otherwise acting upon it after he has

become aware of the fraud ; or by the subject-matter of the

contract being so dealt with that the parties cannot be

reinstated in their former position ; or by innocent third

parties acquiring an interest for value under the contract.

And lapse of time, although it does not otherwise affect

Chap. IV. §4- DUBESS. 155

his right to rescind, is eyidence to show that he intended

to affirm, increasing in strength as the rescission is de-

layed.

It must he home in mind that the contract, until the

defrauded party has made his election, is voidahle, and not

void. It is therefore possible for innocent third parties

to acquire rights under it of which they cannot be deprived

by a subsequent avoidance on the part of the person de-

frauded. A sale of goods procured by fraud cannot be

rescinded so as to revest the property in the vendor if in

the mean time the goods have been solcf to a bond fide

purchaser. If, for the reasons described, the person upon

whom the fraud has been practised has lost his right of

avoidance, he must then be left to his action ex delicto.

An exception to this rule occurs when the fraud goes not

to the quality of goods, or circumstances of the sale, but to

the identity of the person contracted with. The case of see ante,

Cundy u Lindsay, cited above, shows that where A is

induced to send goods to B under the impression that he

is contracting with X the transaction is absolutely void,

and a bond fide purchaser from B acquires no property in

the goods.