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injured party to damages, yet he can obtain rescission if he apply within a reasonable time and provided the misrepresentation is of a substantial and material fact. But an executed contract as, for instance, for a lease or for sale of a chose in action cannot be rescinded except where, as in Armstrong v. Jackson (1917), some fiduciary relationship exists between the parties.
Although the injured party cannot recover damages, he may claim to be restored to the position he occupied before entering into the contract, but where a change of position has resulted and complete restitution cannot be made, rescission may be refused. In Lagunas Nitrate Co. v. Lagunas Syndicate (1899), the plaintiffs had worked certain nitrate deposits which they had purchased from defendants; they afterwards claimed to rescind the contract, but rescission was refused owing to the change of position. There are some exceptions to the rule that an injured party cannot obtain damages on the ground of innocent misrepresentation, e.g., an agent may be sued for breach of warranty of authority if he innocently represents himself as having authority from a principal which he does not actually possess, provided the other party is not aware of the fact and is injured by the misrepresentation; and directors of companies may be liable for untrue statements in a prospectus. This will be considered more fully hereinafter (x).
Fraud in Contracts.
Fraudulent Misrepresentation is a statement made with the knowledge that it is false, or without belief in its truth, or recklessly without caring whether it be true or false. The important case of Derry v. Peek (1889) settled the law on the matter of fraud. The directors of a tramway company had issued a prospectus stating that the company had the right to use steam power in the working of their carriages. As a matter of fact, the consent of the Board of Trade was necessary before steam could be used, and such permission was not given, although the directors honestly thought they would obtain it. The House of Lords held that, as the statement in the prospectus had been made honestly in the belief that it was true, there was no fraud. The effect of this decision has been nullified, so far as concerns directors and promoters of companies, by the Directors' Liability Act, 1890, which is now repealed and its provisions re-enacted by the Companies (Consolidation) Act, 1908, whereby if an action for fraud is brought against directors, in respect of statements contained in a prospectus, the onus is on them to prove that they had reasonable grounds for believing the state(x) See post, p. 277.
ments to be true, or that the statements were the report of an expert believed by them on reasonable grounds to be competent, or that the statements were an exact copy of an official document; but this is fully considered hereinafter, under the heading of LIMITED LIABILITY COMPANIES (y). The law as laid down in Derry v. Peek obtains still as regards other persons, so that a false statement honestly made, but without reasonable grounds for belief in its truth, is not fraud; and, in an action for deceit, the plaintiff must prove actual dishonesty. The fraudulent statement must be one of fact and not of law, it must have been made by one of the parties, and it must have been the reason for entering into the contract. But, although the statement must have been made by one of the parties, it need not be made directly to the other party. If the statement is made to the public generally, anyone who acts upon it can sue. In the case of Andrews v. Mockford (1896), where a prospectus was issued not only to attract subscriptions but also to induce persons to buy shares in the open market, it was held that the office of the prospectus was not exhausted on the allotment of shares, and anyone who, having received a prospectus and relied on its contents, purchased shares in the open market had a cause of action for fraudulent misrepresentation against the promoters. But in Peek v. Gurney (1873), where it was shown that the prospectus was intended to be relied upon only by the original applicants for shares, it was held that no action would lie in similar circumstances.
Representation must be intentional. The representation must be intended to be acted upon by the party to whom it is made, but the representation once made relieves the party from investigation, even if the opportunity is afforded, unless there be circumstances of suspicion which would make it his duty to inquire. In the leading case of Langridge v. Levy (1838), the defendant sold a gun to a customer for his own use and that of his sons. The gun burst and injured the plaintiff, one of the sons, who brought an action for fraud in describing the gun. The jury found fraud, and it was held that plaintiff could recover as the gun was intended, to the knowledge of the defendant, for the use of the plaintiff as well as of the actual purchaser; in other words, the misrepresentation was intended to be acted upon by the plaintiff. As laid down by WOOD V. C. in Barry v. Croskey (1861): "Every man must be held responsible for the consequences of a false representation made by him to another upon which a third person acts . . . provided it appear that such false representation was made with the direct intent that it should be acted upon by such third person in the manner that occasions (y) See post, p. 255.
the injury and loss." JESSEL M. R. in Redgrave v. Hurd (1881) said that if the representation is material, it is an inference of law that it induced the other party to enter into the contract; but this was opposed by LORD BLACKBURN, in Smith v. Chadwick (1882), who thought the question to be one of fact.
Obviously, the other party must be deceived by the misrepresentation, or he has not been misled by it; and, even if he were deceived by a misrepresentation, but did not rely on it when entering into the contract, it was held in Smith v. Chadwick, cited above, that there is no remedy on the ground of fraud. In Horsfall v. Thomas (1862), A bought an article, but did not examine it. It was rendered valueless by a flaw that had been painted over with the intention of concealing it. It was held that, as A had not examined the article, the concealment could not have affected his mind and no action for deceit could be maintained.
As laid down in Derry v. Peek, referred to above, "Fraud without damage or damage without fraud" does not give rise to an action for deceit. Unless actual damage has been suffered, therefore, no action will lie on account of fraud.
Remedies for Fraudulent Misrepresentation
(1) The right to rescind the contract and, if necessary, claim damages. But, if rescission is claimed, it must be claimed within a reasonable time of the discovery of the fraud, and the contract remains valid until rescinded. (2) To defend an action and obtain a declaration that the contract is void.
(3) To abide by the contract and bring an action for damages. It should be noted that by Lord Tenterden's Act no action will lie on a representation, though false and fraudulent, as to character, conduct, credit, ability, trade or dealings of any person made to the intent or purpose of enabling such person to obtain credit, money or goods, unless the representation be made in writing signed by the party to be charged therewith.
As a rule, it is not fraudulent to maintain silence on some matter which, if known to the other party, might cause him to refrain from contracting, providing such non-disclosure does not have the effect of making false that which is stated. "Mere omission, even though such as would give reason for setting aside a contract, is not, in my opinion, if it does not make the substantive statements false, a sufficient ground for maintaining an action for deceit "-COTTON L. J. in Arkwright v. Newbold (1881). "There must, in my opinion, be some active misstatement of fact, or, at all events, such a partial and fragmentary statement of fact as that the withholding of that which is not
stated makes that which is stated absolutely false "—LORD CAIRNS in Peek v. Gurney (1873). There are, however, exceptions to this rule in the group of contracts which are known as contracts uberrimæ fidei (that is, of the utmost good faith). Unless each party to these contracts has disclosed every material fact of which he had knowledge at the time of making the contract, then the contract can be avoided by the party misled by the non-disclosure. Such contracts include all kinds of contracts of insurance; suretyship; contracts to take shares in companies; partnership; and contracts for the sale of land.
Undue Influence and Duress.
Closely allied to fraud is coercion. Where a contract has been entered into under coercion, either through undue influence being exerted, or by duress, the law assumes that consent has not freely been given, and the contract may be avoided by the party coerced; but, if ratified when the effects of the coercion have been entirely removed, the ratification will make the contract good. "Whenever from natural weakness of intellect or from fear-whether reasonably entertained or not-either party is in a state of mental incompetence to resist pressure improperly brought to bear, there is no more consent than in the case of a person of stronger intellect and more robust courage yielding to a more serious danger "-BUTT J. in Scott v. Sebright (1887).
Undue influence is the improper exercise of any power possessed over the mind of one of the contracting parties; duress is actual or threatened violence, or a restraint of liberty, or an abuse of legal proceedings if of a criminal nature. The threatened violence must be of such a kind as to affect a reasonable man, and must relate to himself or the person of his wife or children. Undue influence is presumed, unless evidence to the contrary is adduced, in all cases where such a relationship exists between the parties as to render it probable that consent was not freely given, e.g., trustee and cestui que trust (the person benefiting under the trust), solicitor and client, and guardian and ward; but it was decided in Howes v. Bishop (1909) that this is not presumed in the case of husband and wife; in other cases it depends on the facts, as also does the question as to whether the coercion amounts to duress.
RIGHTS AND OBLIGATIONS UNDER A CONTRACT
Only those who are parties to the contract may, as a rule, enjoy the rights and be subject to the obligations to which
every contract gives rise, that is, those parties between whom is what is known as privity of contract." Thus it was decided in Eley v. Positive Government Security Life Assurance Co. (1876), to the effect that if A agrees with B that he shall do something for the advantage of C, C cannot enforce the obligation against B, for he is not a party to the contract; similarly he could not be bound by any agreement between A and B that he should do something.
But, although generally speaking a third party has no rights and no obligations under a contract, yet he may have a duty-that is, the duty of not interfering with the carrying-out of the obligations under the contract, and any interference will lay him open to liability unless he can justify it.
In the case of Lumley v. Gye (1853) the plaintiff had engaged a singer to sing at his theatre for a certain time under agreement that she should not during that period sing elsewhere. The defendant, who was aware of the facts, with the malicious intention of injuring the plaintiff, enticed and procured the singer to break her contract. It was held that plaintiff had a good cause of action. Providing the act is done knowingly, good faith and the absence of ill-will are not in themselves sufficient excuse for the interference of a third party, as was decided in Reed v. Friendly Society of Stonemasons (1902); and it is immaterial whether the contract is between master and servant or any other form of contract. The justification must exist in fact and must not be founded on a supposed right; but any alleged justification will be dealt with on its merits, as no definition can be given of what would constitute justification. Where a person induces another not to employ a certain person, or to discharge an employee in a way in which he is legally entitled to discharge him, no action will lie, as in the case of Allen v. Flood, cited above. (z) But if a person prevents another from obtaining or continuing employment by threats or influence, which he has the power of enforcing against the employer, and his intention is to compel that other person to pay a debt or is any similar object not directly connected with the act, then an action will lie, as in Giblan v. National Amalgamated Labourers Union (1903). The legislature has, however, stepped in and defined certain cases wherein interference with contracts is not unlawful, and the Trades Disputes Act, 1906, has laid down that an act done by a person in contemplation or furtherance of a trade dispute shall not be actionable on the ground only that it induces some other person to break a contract of employment or that it is an interference with the trade or business or employment of some other person or with the right of some other
(z) See ante, p. 4.