Fraud - Encyclopedia

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FRAUD (Lat. fraus, deceit), in its widest sense, a term which has never been exhaustively defined by an English court of law, and for legal purposes probably cannot usefully be defined. But as denoting a cause of action for which damages can be recovered in civil proceedings it now has a clear and settled meaning. In actions in which damages are claimed for fraud, the difficulties and obscurities which commonly arise are due rather to the complexity of modern commerce and the ingenuity of modern swindlers than to any uncertainty or technicality in the modern law. To succeed in such an action, the person aggrieved must first prove a representation of fact, made either by words, by writing or by conduct, which is in fact untrue. Mere concealment is not actionable unless it amounts not only to suppressio veri, but to suggestio falsi. An expression of opinion or of intention is not enough, unless it can be shown that the opinion was not really held, or that the intention was not really entertained, in which case it must be borne in mind, to use the phrase of Lord Bowen, that the state of a man's mind is as much a matter of fact as the state of his digestion. Next, it must be proved that the representation was made without any honest belief in its truth, that is, either with actual knowledge of its falsity or with a reckless disregard whether it is true or false. It was finally established, after much controversy, in the case of Derry v. Peek in 1889, that a merely negligent misstatement is not actionable. Further, the person aggrieved must prove that the offender made the representation with the intention that he should act on it, though not necessarily directly to him, and that he did in fact act in reliance on it. Lastly, the complainant must prove that, as the direct consequence, he has suffered actual damage capable of pecuniary measurement.

As soon as the case of Derry v. Peek had established, as the general rule of law, that a merely negligent misstatement is not actionable, a statutory exception was made to the rule in the case of directors and promoters of companies who publish prospectuses and similar documents. By the Directors' Liability Act 1890, such persons are liable for damage caused by untrue statements in such documents, unless they can prove that they had reasonable grounds for believing the statements to be true. It is also to be observed that, though damages cannot be recovered in an action for a misrepresentation made with an honest belief in its truth, still any person induced to enter into a contract by a misrepresentation, whether fraudulent or innocent, is entitled to avoid the contract and to obtain a declaration that it is not binding upon him. This is in accordance with the rule of equity, which since the Judicature Act prevails in all the courts. Whether the representation is fraudulent or innocent, the contract is not void, but voidable. The party misled must exercise his option to avoid the contract without delay, and before it has become impossible to restore the other party to the position in which he stood before the contract was made. If he is too late, he can only rely on his claim for damages, and in order to assert this claim it is necessary to prove that the misrepresentation was fraudulent. Fraud, in its wider sense of dishonest dealing, though not a distinct cause of action, is often material as preventing the acquisition of a right, for which good faith is a necessary condition. Also a combination or conspiracy by two or more persons to defraud gives rise to liabilities not very clearly or completely defined.

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