Fraud, Dishonesty and the Tort of Deceit

The tort of deceit is founded on the notion that a falsehood is made with the intention that it should be acted on by the party receiving it. The tort requires the claimant to prove a fraudulent intention.

The modern law of the tort is based on the decision of Lord Hershell in Deek v Peek (1889), where the requirements were defined and explained. The elements of the tort were determined to be as follows:

In order to sustain an action of deceit, there must be proof of fraud, and nothing short of that shall suffice. Secondly, fraud is shown that a false representation has been made:

1) Knowingly, or

2) Without belief in its truth, or

3) Recklessly, carelessly whether it be true or false.

Although I have treated the second and third as distinct cases, I think the third is but an instance of the second, for one who makes a statement under such circumstances can have no real belief in the truth of what he states. To prevent a false statement being fraudulent, there must, I think, always be an honest belief in its truth. And this probably covers the whole ground, for one who knowingly alleges that which is false, has obviously no such honest belief. Thirdly, if fraud be proved, the motive of the person guilty of it is immaterial. It matters not that there was no intention to cheat or to injure the person to whom the statement was made.

A reasonable ground for the belief will avoid a successful claim for deceit, although this is not the ultimate test. The reasonableness of the belief in the light of the factual matrix of the case is material to the likelihood of the belief in its truth.

That is not to say that an unreasonable belief in the truth of the statement would properly found a claim for fraud, but rather merely go to the likelihood that a person would hold the belief. A conscious indifference to the truth, in that the person making the misrepresentation knew the statement to be false, or was sufficiently reckless or careless as to the truth, does not have any honest belief in the truth of the statement which would found an allegation of fraud as much as the knowledge that the statement was false.

Proving Fraud

It is for the claimant to prove the facts (whether in a claim or in a defence) that give rise to the fraud, including the state of mind of the person making the representation and reliance. Such is the seriousness of allegations of dishonesty are treated, English Courts will look for persuasive evidence that the dishonest conduct is more likely than not.

The public interest dictates that a court will not readily draw a conclusion that the mental element for deception has taken place. If the evidence does not convince the court, the action will fail. According, it is not simply a question of having evidence of dishonesty, but convincing evidence of an intrinsic better quality proving the facts that the person making the misrepresentation did so with a guilty mind.

It is likely that a court will be minded to award costs on a higher level of recovery to a defendant who successfully resists allegations of dishonesty.

Nature of the Fraudulent Representation

Deceit presupposes that a misrepresentation has been made. The misrepresentation must be of present fact or law, and may be made by words or conduct. Further, the misrepresentation may indicate approval or support for a false representation made by some third person. In this way, to make out an allegation of fraud, words, conduct or a document must misrepresent a present fact or law, and others supporting the misrepresentation may also be liable.

The general rule prevents statements of future intention to founding actions in deceit. Where the person’s intention is proved to be false at the time the statement was made, a court is likely to take the view that the state of mind is a matter of present fact. As an extension to this, when a person promises to do an act, when they have no intention of fulfilling the obligation, that will also give rise to a strong claim.

A similar rationale applies to statements of opinion. Provided that the opinion is intended to be relied upon and it is relied upon by the receiver of the statement and suffers damage as a result, a dishonestly expressed opinion is enough. Again the difficulties with proof of the falsity of the opinion subsist.

For instance, entering into a contract with no intention of performing would satisfy this test or drawing a cheque and presenting it to the creditor in the knowledge that it will not be paid are likely to form good grounds; the difficulty is proving that the person held the relevant subjective intention at the time of making the representation.

Dishonesty and Silence

Mere silence however is not enough. A claimant must be in a position to point to an act of concealment, to draw a person into acting. Accordingly half truths are capable of sustaining a cause of action in deceit provided that an active withholding of information is proved. This may take the form of a fragmented or partial version of the truth or a misstatement of fact: the key is whether the withheld material makes that which was stated false.

Belief and State of Mind

The essence of fraud is that the person makes a misrepresentation. Although the person’s subjective belief may by measured and cast against an objective standard to test the likelihood of the belief, it must be the case that the person lacked an honest belief in the truth or consciously indifferent to the truth of what was represented.

This belief being present, the claimant must also prove that defendant intended the person to act on or rely on their false statement, in the manner that damage resulted. It is insufficient that the person suspects a person may rely on the statement.

Where an event is a reasonably foreseeable result, it is likely that a court will assume that the defendant intended that consequence. The representation does not need to be made directly to an individual, it may be directed to a class of people intended to act on the representation.

Reliance

The final element of the tort of deceit requires that the claimant acts upon the statement, that is to say relies upon it. If it may be shown that the claimant would have acted in the same way in the event that the representation was not made, an action in deceit will be dismissed, as there is no reliance.

In essence the attempt to deceive on the part of the representor must be successful. The representation is not required to be the sole statement upon which the claimant relied, but it must make a material contribution to the cause of the claimant's actions.

Provided that the representation is made to the claimant in circumstances where a reasonable person would act upon it is sufficient to prove reliance. Indeed further knowledge may be acquired by the claimant after the representation is made, which will not displace the reliance, provided that the new knowledge does not wholly dissipate the false belief engendered by the representation in the first instance.

Damages for Fraud and Deceit

A claimant must show that they have suffered loss as a result of reliance on the misrepresentation. In common with other areas of law, the measure of damages equates to the loss that they have suffered as a result of the conduct of the defendant, and not in the position they would have been if the statement were true. The same applies to this tort.

It may be said that a court will not be receptive to an argument by the defendant that the claimant has suffered damage where they have been deceitful. Where there is any doubt that the claimant has suffered damage, that doubt is likely to be resolved in favour of the claimant.

Loss suffered as a result of an unprofitable transaction, damage to property and to the person are recoverable, and in certain circumstances distress, disappointment and loss of enjoyment. The quantum of the latter are bound to be moderate. The court maintains a jurisdiction to increase these awards where the conduct of the defendant has aggravated the injury to the claimant.

Where the fraud has resulted in the acquisition of property at an overvalue, the measure of loss is the difference between the value at which the property was acquired, less the market value of the property at the date of the transaction. This general principle applies unless there is good reason to depart from it – that is, that the claimant would not be fully compensated for the misrepresentation. Such instances include where the market value was otherwise created by a false market; where the misrepresentation could be construed as a continuing misrepresentation that the victim relied upon to retain the property, or there exist factors that force the victim to retain the asset.

Accordingly, the court will strive to adhere to the principle that a claim ant is entitled to recover all actual damage representing the financial loss flowing directly from his change of position under the inducement of the representations made by the defendant. To achieve this end, the rules relating to the reasonable foreseeability of the loss may well be relaxed.

Furthermore:

1. There is no requirement that the defendant benefits financially;
2. Where the claimant has made a profit in excess of the compensation that he would be entitled, the claimant has not suffered loss.
3. The claimant may recover a profit if it may be shown that the resources expended on the transaction may have been invested by another means.
4. The tort gives rise to a higher measure of damage than that awarded in contract, as the loss is assessed at the time the misrepresentation was relied on, and not at the time of the contract (assuming that the causes of action overlap). Thus, the measure of loss is not limited by the reasonably foreseeable at the time of the contract was formed, but at the date of reliance and having regard for the circumstances at that time.

Where the fraudulent misrepresentation has been made during the course of employment, the employer is jointly and severally liable with the employee for the misrepresentation. So when the statement is made with the actual or ostensible authority of the employer – part of their job – the employer will be liable. Further to this, the employer will often be a better defendant than the employee due to the resources available to them on execution of a judgment.