Deceit The Lie of the Law




4.1 The action in deceit is remarkable in that its viability does not depend on an otherwise subsisting or pending legal relationship, unlike for example a claim in contract or negligence. Furthermore, the claim for deceit may be made as between parties to a contract allegedly induced by the fraudulent misrepresentation or as between a contracting party and a third party or as between parties neither of whom are parties to a contract. In fact, in the 200 years since the decision in Pasley v. Freeman,1 which confirmed the availablity of the cause of action to non-contracting parties, almost 30 per cent of claims for deceit have been made between parties who have not contracted with each other on the faith of the misrepresentation,2 although a small proportion were cases where the alleged fraud was perpetrated in the course of one party’s performance of an already existing contract.3 The circumstances surrounding the allegations and findings of fraud are extremely wide, extending to the domestic, commercial, spiritual4 and public5 spheres of life. The examples are various.6


4.2 Although the reported cases in deceit concern a variety of representations made in the context of a variety of transactions or courses of conduct, there are certain types of transactions and representations which are more prevalent. Most commonly, fraudulent misrepresentations have been claimed to have been made inducing or in respect of the sale and purchase of property, whether land or goods,7 including as to the nature,8 type,9identification,10 genuineness,11 specifications,12 provenance,13 quality and condition,14 fitness for use,15 age,16 value,17 size or quantity,18 capacity,19 location20 and user21 of the subject matter of the transaction, as well as attendant rights,22 the income and revenue earned by the subject matter of the sale,23 the existence, identity, credit or means of the purchaser,24 the means of payment,25 the identity or intention of the manufacturer or supplier,26 the vendor’s or grantor’s title, intellectual property rights, identity or authority,27 the purchaser’s or the purchaser’s agent’s authority,28 third party rights and response bilities,29 the parties’ intentions,30 including the purchaser’s or grantee’s intention to pay for the title to the property,31 the price paid for the property32 and on-sale arrangements.33 For example, in Phillips v. Duke of Buckingham,34 one Phillips, having previously carried out unsuccessful negotiations with the Duke for the purchase of the manor of Sheapeshead and Garrowden, commissioned Lord Nottingham, LC’s secretary, Mr Niccoll, to treat with the Duke, it being pretended to the Duke that the purchase would be for Lord Nottingham or his son, the Solicitor-General. The Duke, believing this to be true and being willing to oblige that family, agreed to sell the estate for £28,000, being less than the true value of £36,000. The Lord Keeper, Lord Guilford, considered that “there had not been fair and open dealing in the managing of this affair” and held that equity ought not to decree this purchase. 4.3 Further, in Fortune Hong Kong Trading Ltd v. Cosco-Feoso (Singapore) Pte Ltd (Freja Scandic),35 the sellers of a cargo of gasoil were then unable to present to the buyers the bills of lading relating to the cargo as required by the sale contract in exchange for payment of the purchase price. Instead, the sellers procured payment by the issue of a letter of indemnity promising to obtain the bills of lading for the cargo. The buyers sued the sellers in deceit on the ground that the letter of indemnity falsely represented that the sellers had title to and possession of the cargo. The court held that a deceit had been established and awarded damages in the sum of the purchase price. Another example is that of Flack v. Pattinson,36 where the purchaser was a British vintage racing car enthusiast who bought from the defendant, for £180,000, a car represented to be “Innes Ireland’s 2.5 litre Grand Prix car”, suggesting it was a Formula 1 car. In fact, the vehicle had a 1.5 litre engine, and could only be used in Formula 2 events. The Court of Appeal held that the claimant relied upon the defendant’s fraudulent misrepresentation and that the latter was liable in deceit. 4.4 Such misrepresentations may also be made in the course of performing the contract of sale and purchase. Issues of fraudulent misrepresentation have also been raised in cases concerning distributorship agreements37 and the leasing38 or pledging39 of property. The transaction in question may involve the transfer, licensing or franchise of intellectual property rights,40 as much as physical property or choses in action.


4.5 Transactions involving the issue or sale of shares in a company, company debentures, or the sale and purchase of a business (including a share in a partnership41) frequent the law reports of the cases of deceit,42 particularly concerning allegations of misrepresentations as to the value,43 turnover,44 capital,45 income and profits,46 losses,47dividends,48 financial performance, prospects or condition,49 licences, funds and assets, 50 liabilities and debts,51 accounts,52 financial reports,53 directors,54 expenses and remuneration,55 the identity of and its contracts and relationship with its customers,56 objects57 and conduct58 of the company or business, in addition to representations as to the identity and intentions of other investors,59 the purchaser’s intentions60 and authority,61 competing purchasers or bidders,62 the vendor’s title,63 the existence of related contracts,64 the genuineness of share certificates or share transfers,65 the number of shares actually or expected to be subscribed or allotted,66 the consideration provided for the shares,67 the treatment of capital and the class of shares,68 the company’s constitution69 and the intended use of the funds raised by the share issue.70 4.6 In Jarrett v. Kennedy,71 the shares in a projected railway company were allotted to the plaintiff upon the basis of a prospectus issued by the promoters; several weeks later, the plaintiff signed the subscribers’ agreement in respect of the shares. In the meantime, the committee of management received a report concluding that, after an inspection of the proposed railway line, the proposed undertaking was impracticable and the capital raised was inadequate for the purpose. It was held that the plaintiff’s subscription was procured by a fraudulent misrepresentation, the statements in the prospectus having been proved false. In Reese River Silver Mining Co v. Smith,72 the plaintiff applied for 100 shares in a company and paid £200 on the faith of a prospectus issued by the directors, which stated that the company had contracted for an American mine on 50 acres of land, containing “several valuable claims”, some of which were in full operation, and making large daily returns. All of this was held to be untrue and the plaintiff succeeded in removing his name from the list of contributories. 4.7 In Briess v. Woolley,73 a company, Nutrifoods Products Ltd, was licensed to manufacture and sell synthetic cream made in accordance with a formula approved by the Ministry of Food. The managing director of Nutrifoods, Rosher, introduced water into the manufactured goods disregarding the approved formula in order to increase the quantity of the cream produced. Without authorisation, Rosher approached the plaintiffs to purchase the shares in Nutrifoods representing that the company’s accounts and profits were based on lawful trading, which Rosher knew to be untrue. Thereafter, as the negotiations were continuing, Rosher sought authority from the shareholders at a general meeting of the company, which noted that Rosher had been pursuing these negotiations and expressly authorised Rosher to proceed to complete the sale of the shares to the plaintiffs. The plaintiffs sued the shareholders in deceit. The House of Lords held that the shareholders were vicariously liable for Rosher’s deceit; although the court found that the fraudulent misrepresentations had been made afresh after Rosher had been authorised, it was also held that had the deceit been confined to false statements made prior to the general meeting’s authorisation of Rosher, having granted the managing director their authority, the shareholders were still liable to the plaintiffs for fraudulent misrepresentation. In Downs v. Chappell,74 the vendors of a bookshop business in King’s Lynn, Norfolk, were held to have fraudulently represented the turnover and profits of the business and were liable for damages in deceit to the purchaser.


4.8 Claims in deceit have also been raised in connection with joint venture or partnership agreements, especially as to the participant’s financial contribution to the joint venture or partnership, or ability to repay debts, the purchase or re-sale price of property purchased by the venture, the performance or status of the property purchased, the treatment of tax liablities in the joint venture’s accounts, or a participant’s accounts or financial condition.75 In Abu Dhabi Investment Company v. H Clarkson & Company Ltd,76the defendants were held liable in deceit to compensate the claimants for the losses they suffered as a result of the collapse of a joint venture concerning the commercial operation of 10 container vessels, to which venture the claimants had committed by reason of fraudulent misrepresentations concerning the service speeds and earnings of the vessels which were said to be well above the container market, as a result of a novel design for the ships. 4.9 Similarly, the termination of a joint venture or partnership agreement has been alleged to have been induced by fraudulent misrepresentations as to the value of the relevant concern or the joint venture or partnership shares.77


4.10 Banks and other institutions which issue letters of credit and performance bonds are particularly exposed to the impact of fraudulent misrepresentations, given that they ordinarily have little knowledge of the transaction which the documentary credits and bonds are designed to secure. It is for this reason that such documents are drafted so as to engage the security only if the terms are complied with strictly. Such terms envisage the presentation of specified documents which in turn contain representations of fact, for example, as to shipment, receipt, payment, default or the progress of a project.78 Further, representations made as to related transactions may induce the granting of the credit or bond.79 If detected, a fraudulent demand under the credit or bond, provided it is the fraud of the beneficiary of the credit or bond, will enable the bank or other institution confronted with a demand for payment to refuse payment.80 Such representations, whether made by the beneficiary or a third party, if untrue will often induce the institution issuing the credit or the bond to pay funds to the representor or a third party. If the representations are knowingly untrue, an action in deceit will result. Such was the case in Standard Chartered Bank v. Pakistan National Shipping Corp (Nos 2 and 4),81 where the seller agreed to sell a cargo of bitumen and the buyers established a letter of credit confirmed by the plaintiff bank for the purpose. That letter of credit required the presentation of bills of lading and other documents which stated that shipment had taken place by 25 October 1993. In fact, the cargo was shipped afterwards. The sellers’ shipping agent agreed with the defendant shipowner to issue a falsely dated bill of lading, which was presented to the plaintiff bank who was induced thereby to pay funds to the sellers under the letter of credit, but when the plaintiff sought payment from the issuing bank, that bank refused. The plaintiff was held to be entitled to recover damages in deceit from the defendant shipowners.


4.11 Likewise, financial investments, the sale of currency and the transfer or acceptance of bills of exchange have given rise to actions in deceit, where there have been alleged misrepresentations as to the genuineness or nature of the negotiable document or the investment or the financial security available,82 the value of a related transaction,83 the identity or size of other participants in the investment,84 or matters of authority.85 In Foster v. Mackinnon,86 the defendant signed a bill of exchange by reason of the acceptor’s fraudulent representation that the document being signed was a guarantee, not a bill of exchange. The jury returned a verdict in favour of the defendant who had been sued upon the bill of exchange.


4.12 Insurance contracts concluded in reliance on alleged misrepresentations as to the nature of the risk, the insurer’s practice, intentions or reinsurance arrangements, or the presentation of insurance claims may occasion actions in deceit,87 as may investments in insurance syndicates or companies.88 In Kettlewell v. Refuge Assurance Company,89 the plaintiff was minded to give up her insurance policy issued by the defendant, but the insurer’s agent fraudulently misrepresented to her that if she continued paying premiums for another four years, she would be entitled to maintain the policy without having to pay further premiums. After having paid premiums for the further four years, the defendant refused to provide her with a free policy. The plaintiff avoided the policy and sought the return of her premiums. The Court of Appeal allowed her to recover on the grounds of the insurers’ agent’s fraudulent misrepresentation of the insurer’s existing practice. 4.13 In practice, insurers have little need to rely on fraud in seeking to avoid an insurance contract, because the insurer seldom requires compensation other than in respect of their claims exposure under the insurance contract and because every insurance contract attracts a duty of utmost good faith, which allows the insurer to benefit not only from a duty to abstain from misrepresentation, whether innocent or otherwise, but also from a duty of full disclosure of material circumstances. A right to sue in deceit, however, will allow the insurer to recover monetary relief, which is denied for a mere breach of the duty of utmost good faith.90


4.14 Where loan agreements, mortgage advances, credit facilities, contracts of guarantee or indemnity have been concluded, allegations of deceit have been levelled in respect of representations as to the title, condition, status or value of the property or assets over which the loan is secured,91 the creditworthiness or identity of the borrower,92 the borrower’s assets, means, debts or accounts,93 the constitution or management of the borrower’s company,94 the identity or authority of the borrower’s agents or advisers,95 the intended use of the funds lent,96 the availability of finance,97 the intended security,98the nature of the subject or related transaction,99 or indeed the identity of the lender.100 In Gordon v. Street,101 a notorious money-lender, Gordon, advertised the availability of loans under the fictitious name of Addison, inducing Street to borrow £100 from Gordon and to issue a promissory note to Gordon for £150, the extra £50 representing interest. Street would not have contracted with Gordon had he known his real identity and sought to set aside the transaction. The evidence was that Gordon had had a prior conviction for fraud, traded under a number of aliases, and had charged as much as 3,000 per cent interest. AL Smith, LJ concluded that “no wonder that such was the odium into which he had got in the public eye as a lender of money”, that he found it necessary to issue instructions to his clerks to ensure that his identity would not be revealed. The Court of Appeal found little difficulty in upholding the finding of fraud and allowing the avoidance of the transaction. Street had been content to return the funds borrowed together with a reasonable amount of interest of 10 per cent.


4.15 A fertile area for the development of the tort of deceit has been the giving of credit and character references to induce the provision of goods or services on credit or the provision of loan facilities.102 It was, in fact, such a reference which provided the impetus to the modern law of deceit in Pasley v. Freeman,103 where the plaintiff successfully sued the defendant upon the representation made in a reference given as to the credit of another person, inducing the plaintiff to supply cochineal to that other person, even though there was no contractual relationship between the plaintiff and the defendant. As a recent example, in Contex Drouzhba Ltd v. Wiseman,104 the court held that a director of a company who had ordered garments on credit was liable in deceit in misrepresenting the ability of the company to pay for the clothes. 4.16 In the years following Pasley v. Freeman, there was a concern that such a right of action in deceit might prove oppressive, especially in the absence of a written representation. Accordingly, Lord Tenterden prepared the Statute of Frauds Amendment Act 1828 which provided that such an action could be brought against the defendant for such a representation, only if the representation was in writing and had been signed by the defendant.105


4.17 Building and constructions contracts and property development transactions may have been agreed or performed on the basis of misrepresentations as to the requirements or specifications of such contracts,106 the nature of the work to be done,107 the identity of the builder,108 or the participants’ or third party’s intentions.109 In Slough Estates plc v. Welwyn Hatfield District Council,110 the plaintiffs had been granted planning permission to develop a large shopping complex within the defendant council’s purview. Before committing themselves to developing the site, they were informed by the council that it intended to enforce their rights under a contract with another developer who had been granted permission to develop another site three miles away to limit the classes of tenants permitted at the other site to reduce competition with the plaintiffs’ site. The plaintiffs, having relied on the council’s representation of intention, successfully sued the council for damages in deceit, the council having knowingly misstated its intention, bearing in mind that it had entered into secret agreements with the other developer to relax the tenant mix agreement.


4.18 Settlement agreements, deeds of release and deeds of composition have also been impugned on the grounds of fraudulent misrepresentation.111 As with any contract, where the terms of the release are deliberately falsely read to, rather than read by, the representee, the latter may rely on the fraudulent representation in setting aside the release or a right of action for damages or pursuing a claim in damages.112 4.19 In Crystal Palace FC (2000) Ltd v. Dowie,113 the manager of a championship football team entered into a compromise agreement with the football club, the claimant, who employed him, setting out the terms on which his employment was to be terminated. During the negotiations, the manager represented to the claimant that he had had no contact with a competing football club, whereas in fact there had been such contact. The claimant sought to rescind the compromise agreement, alternatively claimed damages, by reason of the manager’s fraudulent misrepresentation. The court found that there had been a deceit, but allowed only the claim for damages, and disallowed the rescission of the compromise agreement, because the rescission would have resulted in the reinstatement of the manager’s employment, which would have served as an injustice to the manager’s new employers.


4.20 Contracts of carriage and storage contracts have been alleged to have been procured by fraudulent misrepresentations as to the nature, quantity,114 weight,115 quality or condition,116 or the shipment or receipt117 of the cargo or goods, or as to the location of the carrying vessel.118 In Dent v. Glen Line Ltd,119 the purchaser of a cargo of groundnuts carried on board the vessel Gleniffer from China to London, sued the shipowner inter alia for a fraudulent misrepresentation contained in a bill of lading issued on behalf of the shipowner, which had induced him and his bankers to pay for the cargo upon presentation of the bill of lading. The bill of lading had been issued by the vessel’s China agent stating that the cargo had been “shipped in apparent good order and condition”, whereas the vessel’s chief officer had issued a ship’s receipt for the cargo noting “Groundnuts in green and moist condition, ship not responsible for loss of weight”. Atkinson, J found that a liability for fraudulent misrepresentation (a “legal fraud”) had been established, given that the ship’s agent knew the real condition of the cargo, had been aware that the chief officer had claused the receipt, knew that the statement in the bill of lading was untrue, and had intended to mislead the purchaser and the bankers. 4.21 The performance of contracts of carriage has also been tainted by fraud. For example, in A/S D/S Svendborg v. Akar,120 it was held that the receivers of a container had deceitfully misrepresented that the container was empty on receipt and that the contents had been lost. Such fraud is encountered not only in respect of contracts for the carriage by sea. For example, it has also been held that a knowingly false misrepresentation as to train timetables was held to be actionable in procuring the purchase of a railway ticket.121


4.22 It may be that two parties negotiate towards the conclusion of a contract or the completion of a transaction, but for some reason the contract or transaction does not materialise. In such cases, one of the parties may have become or remain committed to the negotiations by reason of a fraudulent misrepresentation made by the other party and thereby incurs expenditure in pursuing the negotiations, making preparations in the event that the contract or transaction is entered into, or undertaking related inquiries. Such expenses incurred in failed negotiations towards such contracts or transactions have been claimed as damages for deceit where they have been incurred by reason of misrepresentations as to the counterpart’s authority or intentions.122 In Randell v. Trimen,123 the plaintiff vendor was induced to enter into a contract for the supply of stone by an employer’s architect’s representation that he was authorised to purchase the stone by the employer; that representation was knowingly untrue, and the plaintiff was held to be entitled to recover the costs incurred in the unsuccessful proceedings brought against the employer. In Richardson v. Silvester,124 the issue was whether the plaintiff’s pleading disclosed a cause of action in deceit. The court held that an action would lie for a claim for compensation in respect of the costs and expenses to which the plaintiff had been put in inspecting and valuing a property which had been advertised by the defendant in a public newspaper, the Cambrian News, for lease by tender, where the defendant had no authority to let the property and had placed the advertisement for reasons of his own. 4.23 Such wasted expenditure may also arise in the course of performing a contract, rather than concluding a contract. Thus, in A/S D/S Svendborg v. Akar,125 the claimant shipowners were entitled to damages for deceit measured by the costs and expenses incurred in investigating and defending claims made by the defendant receivers, who had represented that the container received by them was empty of the shipped goods.


4.24 Some actions in deceit have been brought in respect of simple cases of cheating or theft, where, for example, the purchaser of goods obtained them without any intention of paying for them,126 or where the deception resulted in the claimant paying funds to the defendant or being deprived of funds,127 or the surrender of property rights,128 or in incurring liability to a third party,129 or the incurring of expense,130 or where an agent has allegedly defrauded or lied to his or her principal,131 or where the principal has been said to have made misrepresentations to their agent.132 The fraud may also extend to misrepresentations as to the terms of the contract or deed which the representee agrees to sign.133 For example, in Moorhouse v. Woolfe,134 a money-lender advertised loans at the rate of 5 per cent and the borrower upon the faith of the advertisement and subsequent dealings with the money-lender borrowed £100 at the rate of 4.5 per cent. The money-lender arranged for the borrower to accompany him to a solicitor’s office to sign what the borrower, not having read the document, thought was security for the loan, but was in fact a bill of sale of the borrower’s assets up to £150. It was held that the bill of sale was procured by a fraudulent misrepresentation and should be set aside. Similarly, in Dufour v. Ackland,135 the plaintiff lost money at a gambling house by reason of the fact that the defendants had cheated him and was held to be entitled to recover the funds he lost as money had and received.


4.25 Great difficulty in determining the availability of a right of action in deceit has been experienced in dealing with issues of paternity fraud, that is, where a mother lies to her partner that he is the father of her child thus inducing the expenditure of funds on the child and mother.136 Still, in a marital context, actions in deceit have been entertained in respect of the agreement of marriage settlements, marriage separation deeds and divorce settlements,137 where representations have been made as to one partner’s, usually the wife’s, virtue,138 a spouse’s intention to re-marry,139 a partner’s age,140 a partner’s capacity to marry,141 the terms of the settlement,142 the couple’s assets,143 or a partner’s debts and means.144 In one early case,145 a man obtained judgment in his claim for deceit against a woman who had given unto him blanda verba matrimonio aequipollentia, inducing him to give “money and other things” to her in the belief that she would marry him. Similarly, a testator’s will may be declared as not his will if procured by a fraudulent misrepresentation, for example that the appointed executrix was the testator’s lawful wife.146 Of course, the impact of fraud or deceit upon such matters today may well be regulated by modern matrimonial, family or other legislation.