Deceit: The Lie of the Law

Peter Macdonald Eggers

• Publisher: Informa Law from Routledge
• Year: 2013
• ISBN:
  9781317912736
• Edition: 1
• Topic: Droit
• Subtopic: Arbitrage, négociation et médiation en droit

Deceit: The Lie of the Law will provide a complete and detailed account of the law of deceit as developed over the past two centuries. This new book by Peter MacDonald Eggers examines the commercial, contractual and civil relationships in which claims in deceit have been made.

Chapter 1

Deceit: Nature, Rationale and Formulation

Introduction

1.1 Fraud is a funny thing. The very words “fraud” or “deceit” shudder with moral outrage. Chaucer has the Parson refer to the honest trade between merchants and the dishonest trade in ecclesiastical privileges or simony:¹

“Now comth deceite bitwixe marchaunt and merchant ... That oother marchandise, that men haunten with fraude and trecherie and deceite, with lesynges and false othes, is cursed and dampnable.”

1.2 The Parson’s condemnation is inflamed by the language of lies and deceit. The echo of “fraud”, like “murder”, throbs against the drums of justice. Fraud is hated viscerally. To be deceived, cheated or defrauded is to have one’s bonds with society shaken: it is to be taken advantage of; it is to be let down. The calls for bass-toned and brimstone-lined retribution can be strident. Fraud is a funny thing, because while this vengeful hostility to lies and deception is indulged by all, most, if not all, of us also indulge ourselves in telling lies. One modern philosopher has stated that:²

“Lying, like breathing, comes naturally to human beings. We lie to hide our insecurities, to make others feel better, to make ourselves feel better, to distract attention from us, to make people like us, to protect the children, to extract ourselves from danger, to conceal our misdeeds, and for the sheer fun of it all. Lying is a universal, practiced with skill the world over.”

That does not mean that we are all fraudulent; at least, not all of us who lie would be called fraudulent from a moral perspective. Legally, however, any lie if seriously pursued will be a fraud and a deceit and may well be actionable in tort.

1.3 It is not surprising that the law responds to frauds, trickery and deceits. It is the very thing for which the law was engraved into stone, tablet and paper. It is engraved into our morality. Human beings have evolved to detect lies and to experience guilt by any attempts at fraud. Evolutionary biologists suggest that the, admittedly erratic, ability to recognise fraud creates an evolutionary stable strategy. Religious faith ingrains in many the moral duty to tell the truth. Even without philosophical or religious conviction, fraud is branded by the honest and dishonest alike as aberrant. And yet, we lie.

1.4 It cannot be that all lies are morally wrong. Nonetheless, our civil law of deceit theoretically deals with all lies in the same way, no matter why they were told, provided of course that they committed the deceived to a course of action that they would not have undertaken but for the deception and that they caused damage. The existence and formulation of a particular rule of law may have its genesis in utility, certainty or fairness. The law concerning fraud and deceit, attested to by such ancient advocates as Hyperides, Aristotle and Cicero,³ is underpinned by our moral duty to tell the truth and the social and commercial necessity of deterring untruths drawing the innocent to their harm. The purpose of this book is to consider the development and the current state of the civil law of fraud in the guise of the tort of deceit,⁴ to consider how it fares having regard to its rationale and ultimately to identify possible areas of improvement.

Deceit and the House of Lords

1.5 The English law of deceit, as an action before the court, has its origin in Chaucer’s age, the fourteenth and fifteenth centuries.⁵ It took its modern form in 1789. Before that time, the action for deceit was focused on the misrepresentation that led to the execution of deeds and contracts,⁶ although it is not clear that it was, in fact, so limited.⁷ The availability of the action beyond contracting parties was confirmed in the first significant decision on the law of deceit in Pasley v. Freeman,⁸ where the Court of King’s Bench allowed a claim against a defendant who gave a credit reference inducing the plaintiff to deliver £2,634 worth of cochineal to another on credit, upon proof of fraud, a knowing misrepresentation, whether or not the representor benefited or intended to benefit from the lie, and whether or not the representor colluded with another. The tort had evolved into a cause of action independent of a contract. In that case, Buller, J described deceit as “a very extensive head in the law”.⁹

1.6 During the following two centuries, deceit has been pleaded in numerous cases and the tort and the general law of misrepresentation has progressed in its evolution, with the milestones intermittently planted by the House of Lords.¹⁰ In 1838, in Attwood v. Small,¹¹ the House emphasised the importance of proving fraud and inducement to an allegation of deceit and a claim for rescission, describing the abstention of fraud as a “universal obligation” resting on “the highest consideration of natural equity”. In 1884, in Smith v. Chadwick,¹² Lord Blackburn explained the nature of the fraudulent representor’s mind and the importance of understanding the meaning of the representation as intended by the representor. Soon afterwards, in 1889, in Derry v. Peek,¹³ the House of Lords, constituted by “great common lawyers”,¹⁴ explained the essence of a fraud sounding in civil liability—the nature and degree of the representor’s knowledge of the falsity of the representation, and the nature of the fraudulent intention—and held that motive was irrelevant to the cause of action, dismissing the possibility of any legal responsibility for negligent misstatement, seemingly (but not actually) overturning the law as affirmed in Pasley v. Freeman a century beforehand. Few decisions of the English courts are as widely known, and not just in England, as Derry v. Peek and it reflects the universal application of the tort of deceit, irrespective of the nature of the legal relationship between the parties.¹⁵ The House of Lords’ judgment in that case was delivered against the background of the lack of monetary relief for non-fraudulent misrepresentations.

1.7 In 1914, in Nocton v. Lord Ashburton,¹⁶ with the great Chancery lawyer, Viscount Haldane on the Woolsack, the scope of legal liability was broadened to allow recovery for negligent misstatement by a fiduciary, but rejected the claim for common law fraud on the facts of the case. In dealing with the tort of deceit, the Lord Chancellor re-affirmed the existence of a “general duty of honesty”, being a duty of “universal obligation”. In 1941, in Bradford Third Equitable Benefit Building Society v. Borders,¹⁷ Viscount Maugham took the opportunity to lay down the classic, albeit non-exhaustive, definition of the tort of deceit, incompletely supplied earlier in Derry v. Peek. In 1963, in Hedley Byrne & Co Ltd v. Heller & Partners,¹⁸ a claim for negligent misrepresentation was allowed at law on proof of a duty of care, thus changing the background to the tort of deceit as formulated by the House of Lords in Derry v. Peek.

1.8 In 1996, in Smith New Court Securities Ltd v. Scrimgeour Vickers (Asset Management) Ltd,¹⁹ the House of Lords explained the measure of damages available to a successful claimant in deceit, noting that the breadth of recovery had a decidedly penal purpose to deter fraud. Recently, in 2002, in Standard Chartered Bank v. Pakistan National Shipping Corp (Nos 2 and 4),²⁰ the House of Lords denied a fraudulent defendant a defence based on contributory negligence and further clarified the width of the tort by holding that individuals acting as agents can be held responsible for deceit alongside the principals who bear a vicarious liability.

1.9 Throughout its modern history, since 1789, the tort of deceit has been clarified and explained often by reference to the moral opprobrium of lying. This book is intended to explore the ingredients of the tort and inquire further into how the law should be clarified or re-stated, with an eye on the tort’s moral foundation. It is not intended to be a history of the tort’s development,²¹ although hopefully that will to some extent be revealed by the discussion of the tort’s elements. In addition, it is not intended to focus on the differences between the common law and equitable responses to a fraudulent misrepresentation,²² although there will be occasions where it will be necessary to highlight such differences. Rather, the intention has been to consider those cases, whenever occurring, where a fraudulent misrepresentation has been alleged and how the courts have dealt with the allegation. In this way, it is hoped that the tort of deceit can be satisfactorily explained.

The Nature and Rationale of the Tort of Deceit

Fraud and damage

1.10 If a defendant is found by a court to have perpetrated a deceit, the court in effect has found that: (a) the defendant acted “fraudulently”; and (b) that the defendant’s fraud caused damage to the claimant. From the earliest development of the tort, it was the combination of fraud and damage (or iniuria and damnum) that distinguished the cause of action at common law. In Baily v. Merrell,²³ Croke, J said that:

“damage without fraud gives no cause of action; but where these two do concur and meet together, there an action lieth.”

1.11 In Ashlin v. White,²⁴ Gibbs, CJ said that:

“the foundation of this action was fraud and falsehood in the defendant, and a damage to the plaintiff by the occasion of such fraud and falsehood. Fraud and falsehood, therefore, mu...