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What is Fraud?

Thursday, 24 May 2012

Most people understand fraud in the criminal sense whereby an individual makes an intentional deception for personal gain or to damage another person. However, fraud plays an equally important role in civil law, primarily where it is used to induce parties into contract. In this context it is generally dealt with by the Misrepresentation Act 1967 but its earliest legal definition arose at common law.

Derry v Peek [1889]

Perhaps the best know definition of fraud was established in the early case of Derry v Peek. A railway company issued a prospectus in which stated it had permission from the Department of Transport to use steam powered trains. Investors invested in the company but it never received the permission and failed shortly thereafter. There was no fraudulent misrepresentation because the issuers of the prospectus had applied for permission and reasonably expected it to be granted. However, Lord Herschell, sitting in the House of Lords, stated:

"Fraud is proved when it is shown that a false representation has been made: i) knowingly; ii) without belief in its truth or iii) recklessly, careless whether it be true or false."

The importance of this definition is reflected in modern statutory provisions. The burden of proof it imposed is significant.

Misrepresentation Act 1967

Where a party has been induced into a contract by the misrepresentation of another he may rescind the contract, claim damages or both. An action may allege negligent misrepresentation or fraudulent misrepresentation. The distinction can be subtle given the facts but it is usually the burden of proof that is the deciding factor. Section 2(1) of the Act - 'Damages for Misrepresentation' indicates why this is the case:

"(1) Where a person has entered into a contract after a misrepresentation has been made to him by another party thereto and as a result thereof he has suffered loss, then, if the person making the misrepresentation would be liable to damages in respect thereof had the misrepresentation been made fraudulently, that person shall be so liable notwithstanding that the misrepresentation was not made fraudulently, unless he proves that he had reasonable ground to believe and did believe up to the time the contract was made the facts represented were true."

Burden of Proof

In alleging fraudulent misrepresentation, a claimant is required to show that the misrepresentation was made by the defendant with an absence of honest belief. Motive is not relevant but the claimant has to show that the defendant failed to check the veracity of his statement or was ignorant as to its truth or not. This actually represents a high bar in practice.

In a claim for negligent misrepresentation the burden of proof is reversed. Where negligent misrepresentation is alleged, the defendant must show in the words of Section 2(1) above, "he had reasonable ground to believe and did believe up to the time the contract was made the facts represented were true." Given the same available remedy, this is usually the preferred route.

If you need advice in respect of claims for misrepresentation or otherwise, Rollingsons has experienced lawyers who can assist you; for more information please contact James Crighton on 0207 611 4848.