Fraudulent Misrepresentation and The Tort of Deceit Explained

Misrepresentation has a complex legal history. Negligent and innocent misrepresentation have actions enshrined in statute (the Misrepresentation Act 1967, the ‘Act’). But the law on fraudulent misrepresentation has been developed through common law and tort, namely the tort of deceit.

The elements of the tort are:

1. The defendant made a representation which was false.
2. The defendant knew that the representation was untrue, or the defendant was reckless as to its truth or falsity.
3. The defendant intended that the representation would induce the claimant to act or refrain from acting.
4. The claimant was in fact induced by the representation to act or refrain from acting.
5. The claimant suffered loss as a result.
   
   

Challenges in Pleading Fraudulent Misrepresentation

There is an element of the unknowable in pleading fraudulent misrepresentation. Establishing limbs 2 and 3 above is no easy task. How do you show that a defendant knew that their representation was untrue? And how do you prove their intent?

As one commentator notes, “Those who tell lies in order to gain an advantage or cause harm to others do not tend to be forthcoming about the true nature of their intentions and activities." ¹

The defendant must know that the representation is false. It would be wholly unfair to be liable in deceit if the defendant truly believed that the representation was true. In this sense, the test of dishonesty is subjective. However, the more unreasonable the defendant’s stated belief, the less likely it will be that the court will accept his / her evidence.

When it comes to intention, it will generally be impossible to produce evidence. However, it was confirmed by the Court of Appeal in Eco 3 Capital Ltd v Ludsin Overseas Ltd [2013] EWCA Civ 413 that intention is not a freestanding or separate element of the tort of deceit. Instead, it is merely a way of describing the two mental elements of the tort: knowledge of falsity and an intention that the claimant should rely upon the misrepresentation. It is not always necessary to establish this element.

The Recourse Available

The primary recourse that a claimant will be seeking is damages to compensate them for the losses they suffered. In Glossop Cartons and Print Ltd and others v Contact (Print & Packaging) Ltd and others², the Court of Appeal held that, as a general principle, the proper approach for calculating damages for fraudulent misrepresentation should be to (i) ascertain the actual value of the assets bought at the relevant date and (ii) deduct that figure from the price paid.

The general rule in a claim for deceit is that any actual damage which flows directly from the fraudulent inducement can be the subject of recovery. The claimant can recover consequential losses (such as expenses incurred by reason of having acquired an asset or entered into a transaction, or profits foregone on an alternative acquisition or transaction). It also means that the claimant can recover losses which would be too remote in a contractual or negligence-based case.

While it is not mandatory for the parties to have entered a contractual relationship in order to bring a claim for deceit, there is recourse available if they have. If a claimant is successful in establishing a claim in deceit then they may be able to rescind the contract that they entered into. Whether or not this is actually available will be subject of further scrutiny, such as whether the contract was affirmed.

Why would a claimant plead fraudulent misrepresentation/deceit?

There is another route to achieving the rescinding of the contract (known as recission) and damages for misrepresentation - and it’s an easier route for a claimant to pursue.

The Misrepresentation Act 1967 allows claimants to rescind a contract and receive damages for non-fraudulent misrepresentations. To establish a claim in innocent or negligent misrepresentation, a claimant does not need to prove the defendant’s state of mind, as they do in a fraudulent misrepresentation claim. Instead, the burden shifts to the defendant to prove that they had reasonable grounds for believing that their representation was true.

So why would a claimant bring a claim for deceit rather than one for innocent or negligent misrepresentation, which may have the same outcome and require a lower evidential threshold?

It often comes down to whether or not there was a contract between the parties. Claims under section 2(1) of the Act (for negligent or innocent misrepresentation) can only be brought in circumstances in which the claimant has entered into a contract after the misrepresentation. The claim can only be brought against a party to that contract.

Claims in deceit, however, are not subject to those restrictions. It is not dependent on any pre-existing legal relationship between the parties. A claim for deceit may be brought where a person’s representation induced the other person to act. Some examples of representations that have the capability of being deceitful include:

• A vendor of a horse represents that he does not believe that the horse is suffering from any diseases when, to his knowledge, the horse is indeed suffering disease.
• In answer to pre-contract enquiries, a vendor says that there were no defects in title.
• A director who executes a contract on behalf of a company, by which the company promises payment at some future date, knows that the company will in fact not be able to make the payment (especially if the company is on the brink of insolvency).
• A vendor deliberately covers up active patches of dry rot in a flat which was for sale.

Conclusion

The tort of deceit is really founded in morality. Given the element of dishonesty, it can sometimes be a difficult claim to prove.

But the damages are more far-reaching and expansive than in claims for non-fraudulent misrepresentation. Where a contract is entered into, there is often a ‘fall-back’ action in negligent misrepresentation, which will also result in damages, and recission of the contract if successful.

¹ Civil Fraud, 1st Edition, Thomas Grant KC David Mumford KC

² [2021] EWCA Civ 639