This article has been written by Diva Rai, 1st year student, Symbiosis Law School, Noida. In this article she discusses fraud and deceit in torts, their elements, damages and remedies to it.

What is the Tort of Deceit?

When a person intentionally and knowingly deceives another person into an action that damages them, it is a type of a legal injury that occurs. Deceit specifically requires the tortfeasor to make a factual representation very well knowing of the fact that it is false, or indifferent or reckless about its truthfulness, intending that the other person relies on it, and then act in reliance on it, to his own harm. Under section 421 of the IPC or the Indian Penal Code and 17 of the Indian Contract Act (ICA), fraud is defined.

What is the meaning of Deceit and Fraud?

Fraud – a false or untrue representation of the fact, that is made with the knowledge of its falsity or without the belief in its truth or a reckless statement which may or may not be true, with intention to induce a person or individual to act independent of it with the result that the person acts on it and suffers damage and harm. In other words, it is a wrong act or criminal deception with an intention to result in financial or personal gain. In Dr. Vimla vs Delhi Administration [1], it was held that fraud is an intention to deceive involving deceit and injury to another person as its two elements.

Illustration: False insurance claims made by one to their insurer in case of a motor accident.

Deceit– a tort arising from an untrue or false statement of facts which are made by a person, recklessly or knowingly, with an intention that it shall be acted upon by the other person, who would suffer damages as a result. In other words, it is the practice or action of deceiving someone by misrepresenting the truth. In Ram Chandra Singh vs Savitri Devi [2] it was held that deceit was a fraudulent misrepresentation that consisted of leading a man into damage by recklessly and willfully causing him to believe and trust an act according to it.

Illustration: Drawing a cheque and presenting it to the creditor in the knowledge that it will not be paid.

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What is Fraudulent Misrepresentation?

Fraudulent misrepresentation means a lie that is used to trick someone into an agreement which would cause some harm to them. Misrepresentations can be spoken, written, gestured, or even made through silence. A claim for fraudulent misrepresentation is found in the tort of deceit.

Example- If a jeweler sells a diamond ring which is later discovered to be a is crystal, then it is a fraudulent misrepresentation.

What are the elements of Fraudulent Misrepresentation?

The elements for fraudulent misrepresentation are:

  • False representation to the claimant must be made by the defendant,
  • the defendant should know that the depiction is false, or reckless as to whether it is true or false,
  • the defendant should intend that the claimant must act in dependence on it,
  • the claimant must act in reliance and trust on the representation and suffer loss as a consequence.

What is meant by Fraudulent Concealment?

Mere non-disclosure when a party has a duty to disclose. The essential elements to establish a prima facie case of fraudulent concealment are:

  • Concealing of a material relevant fact by the defendant,
  • the defendant should be under an obligation to disclose the facts to the plaintiff,
  • the defendant intentionally must have hidden or concealed the fact with the intent to deceive the plaintiff,
  • the plaintiff must be ignorant of the fact and wouldn’t have acted or behaved as he did if he knew about the concealed fact,
  • the concealment caused the plaintiff to sustain damage.

Non Disclosure of Known facts

It is not an actionable fraud wherein material information is known to a party and not to the other party. Responsibility or duty to disclose acknowledged information arises in which the party with the expertise of the facts is in a fiduciary or confidential relationship. The inability to disclose a negative fact that might have a foreseeably discouraging impact on income expected to be created by means of business is tortious.

Active Concealment of known facts

Intentional active concealment exists where a party knows of the defects in a property, deliberately conceals them, actively prevents investigation and discovery of material information by way of the other party, makes misleading statements, does not speak honestly or suppresses facts.In a claim of fraud that is by a false promise, the essential elements are as follows:

  • the defendant should have made a promise intending not to perform or act in accordance with it,
  • the promise must have been made with an intent to defraud the plaintiff, for the purpose of persuading the plaintiff to depend and rely upon it and act or refrain from acting in reliance upon it,
  • the plaintiff must have been ignorant of the defendant’s intention and must have acted in reliance upon the promise and must be justified in doing so,
  • as a result of reliance on the promise by the defendant, the plaintiff must have sustained damage.

Proof of Intent not to perform

When the promise was made, the conduct of a party making a promise either before or after the promise was made, should be taken into consideration to determine whether there was an intention to perform or not.

What is Negligent Misrepresentation?

The essential elements by a negligent misrepresentation for a claim of fraud are:

  • the defendant must make a representation as to a past or existing material fact,
  • the representation must  be untrue,
  • the representation should be without any reasonable ground (regardless of the defendant’s actual belief)  for believing it to be true,
  • it must be made with the intent to induce the plaintiff to rely and trust upon it,
  • the plaintiff must be unaware of the falsity of the representation, and thus acting in reliance upon the truth of the representation and must be justified in doing so,
  • as a result, damages must have occurred and sustained by the plaintiff.

Difference  between Criminal and Civil fraud

Criminal Fraud

Civil Fraud

The case is brought forward by either the local state or the federal prosecutors.

The victim or the aggrieved party brings forward the case to the court.

A person accused intended on committing fraud needs to be proved.

The victim has to prove that the person being accused has misrepresented the facts although he knew that they were false.

Actual damage may not have occurred.

Actual damage needs to have occurred.

Success by the state results in the punishment of the defendant by fine, imprisonment, etc.

Success by the plaintiff results in restitution in the form of damages.

Examples- Mail fraud, Securities fraud, Tax evasion, etc.   

Examples- Check forgery, pyramid schemes, selling fake or counterfeit items on the internet, etc.

 

What are the essential elements for the Tort of Deceit?

A claimant in deceit must prove the following elements-

False representation- This means that the defendant lied or misrepresented the facts. In Pasley v. Freeman [3]-

  • The plaintiff was dealing in cochineal at the time when the cause of action arose and had a large stock at hand which he anxiously wanted to dispose of.
  • Learning this the defendant said the plaintiff that he knew a buyer who would purchase the stock of cochineal. The plaintiff asked: “Is he a respectable and substantial person?” “Certainly he is” was the defendant’s reply, knowing well that he was not.
  • The plaintiff on his representations faith gave that purchaser 16 cochineal bags on credit worth around 3,000 sterling pounds.
  • When the bill became due, it turned out that the purchaser was insolvent and the plaintiff was unable to recover his money from the purchaser, the defendant was sued for making a false representation to him by compensating him.
  • The defendant was held liable to the plaintiff as far as he had suffered as a result of the former’s false statement about that buyer’s credit and character.


Knowledge of falsity- The defendant must know that the representation was false, or at least had no genuine belief that it was true. In Derry v. Peek [4]-

  • An act incorporating a tram company provided that, with the consent of the Board of Trade, carriages could be moved by animal power, by steam power.
  • The directors issued a prospectus stating that the company was entitled to use steam power instead of horses under the Act.  The complainant took shares in this statements faith.
  • An act incorporating a tram company provided that, with the consent of the Board of Trade, carriages could be moved by animal power, by steam power.
  • The trading board declined their consent to use steam power and the company was wound up.
  • In an action against the directors for false statement, they were held not to be liable for the misrepresentation as they honestly believed that the statement was true even though they were guilty of some carelessness in making it.

Acting on the statement- The defendant made the representation with the intent that the plaintiff should act upon it. In Langridge v. Levy [5]-

  • The defendant sold a gun for use by himself and his sons to the plaintiff’s father, representing that the gun was made by a well-known manufacturer and safe to use, the son used the gun that exploded wounding his hand.  
  • It was held that the defendant was liable to the son because there was a contract between them, not on his warranty, but for deceit.

Damage by acting on the statement- That the plaintiff acted in reliance on the statement and suffered damage as a consequence. No action will lie for a false statement unless the plaintiff, in fact, relies upon it.

In Denton v. G.N. Ry. Co. [6]-

  • A train that had been taken off was announced as still running in a railway company’s current timetable.
  • This was a misrepresentation and a person had missed an appointment by relying on it and the loss incurred was held to have a deceit action.

What are the Remedies given?

The tort of deceit is a cause of action that enables the victims to recover the financial loss that has been incurred due to being deceived. These losses can also include the cost of the investigation of the fraud. The four essentials must be fulfilled and the statement must be both false and dishonestly made. The leading authority on this point is still Derry v Peek in which Lord Herschell said:

“First, in order to sustain an action in deceit, there must be proof of fraud and nothing short of that will suffice. Secondly, fraud is proved when it is shown that a false representation has been made (1) knowingly, (2) without belief in its truth, or (3) recklessly, careless whether it be true or false.”

What is the Effect of Silence?

Simply remaining silent about something will not in a usual course amount to false representation. But there are some exceptions to this rule.

 

Half-truths: It is a statement which only tells a part of the truth. It can be a false representation if the left out part of the statement makes what is said to be misleading and conveys some other meaning. Example- If A says, “I am a good driver. In the past thirty years, I have gotten only four speeding tickets.” This statement is true, but irrelevant if he started driving a week ago.

Deliberate concealment: Actively concealing information can amount to a false representation. Example- While selling clothes, Mr. B actively conceals a stain while showing the apparel which the buyer would otherwise have easily been able to see, he is making a false representation that the fault does not exist.

Failure to meet statutory requirements: In some circumstances, there is a statutory duty of the person to reveal some particular information. If in such cases he fails to do so then it can amount to a false representation.

What are the Damages given for Deceit?

The claimant is entitled to be put back into the position in which he or she would have been in if the deceit had not taken place. In other words, this means that if, for example, a claimant was led to believe they were buying a property worth Rs. 10,00,000 but the defendant knew that it was only worth Rs. 5,00,000, then the claimant is entitled to damages Rs. 5,00,000 and may claim it. This means that the defendant is liable for all losses directly flowing from their wrongdoing.

In some certain circumstances punitive damages so as to punish the person who defrauded may be levied. These are usually related to the actual losses suffered, the degree of malice and deceit showed.

What is it’s Relationship with Negligence?

It was decided in Hedley Byrne & Co Ltd v. Heller & Partners Ltd [7] ,  that individuals who make the statements which they should have known were false a direct result of their carelessness or negligence, can in certain circumstances, be liable to make compensation for any loss flowing, notwithstanding the decision in Derry v Peek. In the case of Bradford Equitable B S. v Borders [8], it was held that in addition, the person who made the statement must have intended for the claimant to have depended upon the statement. Negligence and deceit vary with respect to the remoteness of damages and harm suffered. In deceit, the defendant is liable for all losses flowing directly from the tort, regardless of whether they were predictable or not.

In Doyle v. Olby (Ironmongers) Ltd [9], Lord Denning MR commented, “it does not lie in the mouth of the fraudulent person to say that they could not reasonably have been foreseen.” So where there is an unexpected sudden downturn in the property market, an individual liable of deceitful misrepresentation is liable for all the claimant’s losses, regardless of whether they have been increased by such an unforeseen occasion. This is subject to an obligation to alleviate potential misfortunes. Contributory negligence is no defense in an action for deceit. However proving deceit is far more difficult than proving negligence, because of the prerequisite for intention.

References

[1]- 1963 AIR 1572, 1963 SCR Supl. (2) 585

[2]- AIR 2004 SC 4096

[3]-100 Eng. Rep. 450 (K.B. 1789)

[4]- (1889) LR 14 App Cas 337,, UKHL 1

[5]- Meeson & Welsby 519 (1837)

[6]- 854 S.W.2d 885 (Tenn. Ct. App. 1993)

[7]- AC 465,, 2 All ER 575,, 3 WLR 101,, UKHL 4

[8]- [1941] 2 All ER 205, HL

[9]- [1969] 2 QB 158

 

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