Deceit or Fraud: A Summary
Deceit, also known as fraud in the legal context, refers to a willful act of making a false
statement with the intent to mislead another person, causing them to act on it and
subsequently suffer damage.
Essential Elements of Deceit
For an action of deceit to succeed, the following must be proved:
1. False Representation:
o The defendant made a false statement of fact, either in words or through
conduct.
o Example: In Edgington v. Fitzmaurice, directors raised loans under false
pretenses about the purpose of the funds.
2. Knowledge of Falsity:
o The defendant either knew the statement was false or did not honestly believe
it to be true (scienter).
o Negligence is not sufficient unless accompanied by reckless disregard for the
truth.
o Case: Derry v. Peek held that a misrepresentation made with an honest belief
in its truth does not amount to deceit.
3. Intention to Deceive:
o The defendant made the statement intending that the plaintiff should rely on it.
o Example: In Langridge v. Levy, a fraudulent statement about a gun’s safety
intended for use by the buyer’s son made the defendant liable when the son
was injured.
4. Plaintiff’s Reliance:
o The plaintiff relied on the false statement and acted upon it.
5. Damage to Plaintiff:
o The plaintiff suffered actual damage as a result of acting on the false
representation.
False Statement of Fact
Required for Deceit: A false statement must concern a fact.
o Conduct may also constitute a false representation if it creates a false
impression (R v. Barnard).
Mere Silence is Not Fraud:
Generally, failing to disclose information is not fraudulent.
o Case: In Sri Krishan v. Kurukshetra University, the candidate’s silence about
insufficient attendance did not amount to fraud.
Exceptions to Mere Silence:
1. Duty to Disclose:
o If there is a duty to speak, silence can amount to fraud.
o Example: In insurance contracts, all material facts must be disclosed (contracts
uberrimae fidei).
2. Change in Facts:
o If facts change after making a truthful statement, there is a duty to disclose the
changes (With v. O’Flanagan).
3. Partial Truth:
o Speaking a half-truth or withholding material information that creates a false
impression can be fraud.
4. Active Concealment:
o Hiding defects actively constitutes fraud, as it implies no defects exist.
o Example: Concealing defects in goods sold to a buyer.
Key Case Law
1. Derry v. Peek:
o Honest belief in the truth of a statement negates fraud.
o Fraud requires knowledge of falsity or reckless disregard for the truth.
2. Langridge v. Levy:
o Fraudulent statements made to a third party but intended to affect the plaintiff
are actionable.
3. Peek v. Gurney:
o Liability for false statements in prospectuses is limited to the intended
audience (e.g., original shareholders, not subsequent buyers).
Application
Deceit addresses intentional dishonesty in statements or conduct. Courts emphasize scienter
(knowledge or recklessness) and a clear causal link between the misrepresentation and the
plaintiff’s damage. This makes deceit distinct from negligence or innocent misrepresentation,
which lack the element of intentional dishonesty.
The Plaintiff Must Be Actually Deceived
To establish an action for deceit or fraud, the plaintiff must show they were actually misled
by the false statement and that they suffered damage as a result. A mere attempt to deceive
without actual reliance or resulting damage does not amount to fraud.
Key Principles
1. Reliance on the Misrepresentation:
o The plaintiff must have acted upon the false representation believing it to be
true.
o If the plaintiff did not rely on the statement, fraud cannot be established.
o Example: In Horsfall v. Thomas, the plaintiff tried to conceal a defect in a gun
by plugging it, but the defendant never inspected the gun before purchase.
Since the defendant was not influenced by the concealment, no fraud occurred.
2. Proof of Damage:
o The plaintiff must prove actual damage resulting from the reliance on the false
statement.
o Mere deception without any tangible detriment or loss to the plaintiff does not
constitute fraud.
Case Law Illustration
Horsfall v. Thomas:
Facts: The seller plugged a defect in a gun to conceal it. The buyer, however, did not
inspect the gun before purchase and claimed fraud upon discovering the defect.
Held: There was no fraud because the buyer did not rely on the concealment. The
seller’s attempt to deceive did not influence the buyer's decision.
Rationale: For fraud to exist, the deception must affect the plaintiff’s actions or
decisions.
Negligent Misstatements
Negligent misstatements occur when a person carelessly makes a false statement, causing
harm to someone who reasonably relied on it. Unlike fraudulent misstatements, negligence
does not require intent to deceive but hinges on the failure to exercise due care.
Key Principles
1. Historical Context:
o Early cases like Cann v. Wilson (1888) recognized liability for negligent
misstatements, particularly where the defendant was in a position of trust or
professional expertise.
o However, in Derry v. Peek (1889), the House of Lords held that negligence
alone did not suffice for liability in deceit; intent to deceive was necessary.
This view initially led to the rejection of liability for mere negligence in cases
like Le Lievre v. Gould (1893).
2. Shift in Doctrine: Hedley Byrne Principle:
o In Hedley Byrne & Co. Ltd. v. Heller & Partners Ltd. (1964), the House of
Lords established liability for negligent misstatements under specific
circumstances, even in the absence of contractual or fiduciary relationships.
o Lord Reid outlined that a duty of care arises when:
The defendant possesses special skill or knowledge.
The plaintiff reasonably relies on the defendant's statement.
It is foreseeable that reliance will result in harm if the statement is
negligently made.
Case Law Highlights
1. Cann v. Wilson (1888):
o Facts: Property valuers negligently overvalued property used as mortgage
security. The plaintiff granted a loan based on the valuation and suffered a loss
when the true value was insufficient to cover the debt.
o Held: The defendants were liable as they owed a duty of care in preparing the
valuation, knowing it would be relied upon.
2. Derry v. Peek (1889):
o Facts: A company prospectus falsely stated it had permission to use steam-
powered trams. The directors believed the approval would be granted. When it
was denied, the plaintiff sued for deceit.
o Held: No liability for negligence alone; deceit required fraudulent intent.
3. Hedley Byrne & Co. Ltd. v. Heller & Partners Ltd. (1964):
o Facts: The defendant bank provided a credit reference for a client, disclaiming
responsibility for its accuracy. The plaintiff relied on this and suffered a
financial loss.
o Held: Though the disclaimer shielded the defendant, the House of Lords
recognized a duty of care in making statements where reliance was
foreseeable.
Modern Principles of Liability
1. Duty of Care:
o A duty arises when the defendant is in a position of expertise and knows or
ought to know that their statement will likely be relied upon.
2. Reasonable Reliance:
o The plaintiff’s reliance must be reasonable under the circumstances.
3. Foreseeable Harm:
o The harm suffered by the plaintiff must be a foreseeable consequence of the
negligent misstatement.
4. Disclaimers:
o Liability can be negated if the defendant explicitly disclaims responsibility for
the statement, as in Hedley Byrne.
Conclusion
The doctrine of negligent misstatements imposes a duty of care on individuals making
statements in contexts where reliance is foreseeable and reasonable. Hedley Byrne remains a
cornerstone in this area of law, bridging the gap between fraudulent misstatements and
negligence-based claims.
Innocent Misrepresentations
An innocent misrepresentation occurs when a false statement is made without intent to
deceive and without negligence. Unlike fraudulent or negligent misstatements, liability under
tort law does not arise for innocent misrepresentations. However, remedies may be available
under specific statutory provisions, particularly in contract law.
Key Principles
1. No Liability Under Tort:
o A claim for damages cannot be made under tort law for an innocent
misrepresentation since it lacks both the intent to deceive and negligence.
2. Liability Under Statute:
o In England, the Misrepresentation Act, 1967 introduced provisions to
compensate for losses caused by innocent misrepresentations if they lead to a
contract.
Provisions of the Misrepresentation Act, 1967
1. Damages for Innocent Misrepresentation (Section 2(1)):
o If a person enters into a contract based on a misrepresentation and suffers loss,
the person making the misrepresentation may be held liable for damages even
if the statement was made innocently, provided:
The misrepresentation would have been actionable if made
fraudulently.
The defendant cannot prove that they had reasonable grounds to
believe and did believe the statement was true when made.
2. Conditions for Liability:
o Existence of a Contract: The Act applies only when a contract is formed
based on the misrepresentation.
o Reasonable Belief: The defendant can avoid liability by demonstrating they
reasonably believed the statement was true.
3. Alternative to Rescission:
o The Act allows courts to award damages in lieu of rescission of the contract.
This means that instead of undoing the contract, the court may order monetary
compensation for the misrepresentation.
Illustration
A seller states that a car has done 20,000 miles, believing it to be true based on available
records. The buyer later discovers it had done 30,000 miles. The seller neither intended to
deceive nor was negligent. Under the Misrepresentation Act, 1967, the buyer can claim
damages if:
A contract was formed based on the statement.
The seller cannot prove they reasonably believed the mileage was accurate.
Comparison with Negligent Misstatements
If there is no contractual relationship, liability for a misrepresentation can still arise under tort
principles, as established in Hedley Byrne & Co. Ltd. v. Heller & Partners Ltd., but only if
the misstatement was negligently made.
