Legal Actions Available to a Party Who Has Suffered as a result of Fraudulent Misrepresentation - Case Study Example

Business Law Name: Course Professor’s name University name City, State Date of submission I INTRODUCTION When A makes a false state to B, knowing it to be false or is reckless as to its truth, with the intention that B should act upon it, and B acts as desired and suffers damage as a result, A is liable to B in the tort of deceit.1 In the business world, parties often rely on the information provided by others to make informed decisions. However, the other party might recklessly or fraudulently make statements intended to deceive the first party. Should the first party act as intended and later discovers that a fraudulent misrepresentation has been made, it is useful to sue the second party for damages under the tort of deceit. In addition, there are criminal proceedings that might be undertaken. The aim of this paper is to investigate the legal actions available to a party who has suffered as a result of fraudulent misrepresentation. It will also explore the possibility of any criminal liability that might accrue through the use of facts given in sample case. II ELEMENTS OF THE TORT OF DECEIT One of the elements of the tort of deceit is the presence of false representation. In the case of AIC Ltd V Testing Services (UK) Ltd (2006) the facts were that the defendant wrongly certified gasoline cargo using incorrect tests.2 On discovery that the cargo did not meet the necessary specifications, the defendants stood by their initial certification. It was held that the defendant was not liable for the tort of deceit because dishonesty could not be proved by the defendant standing by historical document that could not be changed. The implication is that misrepresentation must be made through actions, words or through conduct. Passive non-disclosure does not amount to fraudulent misrepresentation. In the sample case, Mr. Eggplant made the misrepresentation in writing. This is deduced from the historical accounting figures that he passed as true when selling the business to Mr. Manfredi. His actions and conduct betray the misrepresentation as he actively engaged in creative accounting and approached Mr. Manfredi to buy the business. For an action to qualify under the tort of deceit, it should be proved that a defendant had knowledge of that the statement was false. In the case of Derry v Peek (1889), directors of a company honestly believed that they would gain access to certain rights that would give the company a competitive advantage though the rights had yet to be given.3 Based on this, the directors went ahead to quote in a prospectus that they had they rights. It was ruled that they were not liable under the tort of deceit as they did not make any fraudulent misrepresentation. A false statement must meet one of these three conditions: It was made knowingly, or Without belief in its truth; or Recklessly. In the sample case, Mr. Eggplant made the falsifications knowingly. This is deduced by the fact that all figures were inflated by 60% and it is hardly in doubt that such a number can be made consistently without knowledge. Moreover, there were records of tax, receipts and cash register tapes showing that the director had knowledge that he was making fraudulent misrepresentations. In the case of Edgington v Fitzmaurice (1884), it was argued that the state of a man is a matter of fact.4 Therefore, it can be argued that Mr. Eggplant knew for a fact that the records from the tax office and the cash till would not add up to the accounting results he presented to Mr. Manfredi. Therefore, Mr. Manfriedi is not required to prove that Mr. Eggplant knew of the falsifications as it is has been ruled that the state of a man’s mind is a fact. In claiming for restitution under deceit, it must be proved that the defendant intended the statement to be acted upon by the claimant. However, this leaves the claimants to be anybody who comes across the statement. To limit this cause of events from occurring, claimants are restricted to be those people who the defendant approached directly. If this did not happen, then claimants can be that class of people to whom the statement was addressed. In this case, a false misrepresentation in a prospectus can be established by one of the shareholders who bought shares based on the statement. In the sample case, it can be argued that the defendant knew of the true nature of the business as can be proved through the tax records and cash till receipts so obtained. By hyping up the numbers, sit can be further deduced that the defendant intended to make the business appear profitable for purchase by the plaintiff. This is supported by the case of Langridge v Levy (1837) where the defendant knew that a gun was faulty yet persisted in passing it as sound and functional.5 The plaintiff’s father bought the gun, pronouncing that it was intended for his son. When the gun caused personal injury to the claimant, it was held that the defendant was liable for falsehoods that were directed at making the claimant act in a certain way, which in this case was to purchase the faulty gun. In the case of Hedley Bryrne & Co Ltd v Heller & Partners Ltd (1964), it was ruled that there must be the existence of a special relationship between the claimant and the respondent for a duty of care to arise.6 In the sample case, Mr. Manfredi expected that Mr. Eggplant would prepare statements that showed the truthful nature of the business to be sold. Facts of the sample case do not show that Mr. Eggplant excused himself from satisfying this duty and it can be inferred that he undertook to assume the said duty of care to Mr. Manfredi. This has the consequence of implying that there was a duty of care owed by the defendant to the plaintiff and that there was the acceptance of this duty by the defendant. Therefore, Mr. Manfredi was not expected to exercise any further caution regarding the statements presented to him by the defendant. In determine whether to charge Mr. Eggplant personally, it is useful to refer to the case of Standard Chartered Bank v Pakistan National Shipping Corporation (2003).7 In the case, it was held that when a director commit fraud while acting on the behest of another party (e.g. the company), then the director can be held liable personally. Therefore, Mr. Manfredi can sue Mr. Eggplant personally for the tort of deceit. In the suit, it is mandatory that Mr. Manfredi shows that he suffered loss as a result of taking the cause of action that was intended by Mr. Eggplant. This can be proved by applying the Re Polemis test of remoteness.8 In the claim for damages, only those damages that satisfy the requirements of this test will be paid. Under the tort of deceit, the test of foreseeability of damage is not used. If he had indicated desire to buy the business irrespective of its finances, then there would be no course for action under the tort of deceit. In his claim for damages, Mr. ManFredi can claim them to be the difference between the price he paid for the business and the price that he should have paid had the falsification not been made. Mr. Manfredi might also recover the business losses the company has made since he purchased it from Mr. Eggplant. Moreover, Mr. Manfredi might also be awarded exemplary damages should he prove that his feelings were injured and inconvenience incurred. As was argued in the case of Ahmed v Addy (2004), the tort of deceit does overlap with criminal liability.9 Under Australian law, deceit is prohibited under the Competition and Consumer Act (2010). Article section 18, article 1 states that “a person must not, in trade or commerce, engage in conduct that is misleading or deceptive or likely to mislead or deceive.”10 Therefore, Mr. Eggplant might be sued using legislation for the crime of deceit. In this case, it would be mandatory for the criminal standard of proof to be satisfied first before civil proceedings take place. III CONCLUSION The tort of deceit is one of the many torts covered by Australian law, under the category of English common law. Based on the fact that the laws of tort are made on a case by case basis, it is confusing on what the right remedy for a breach or injury should be. In the case presented for the intents of this study, Mr. Manfredi has several alternative points to prove if his case against Mr. Eggplant is to hold. One, Mr. Manfredi must prove that there was deceit or misrepresentation. As argued in the case of AIC Ltd v Testing Services (UK) Ltd (2006), where the defendant honestly believes that he is presenting a fact cannot account as deceit. Moreover, when the defendant opts to stand by a historical document that is deceptive cannot amount to deception. For deception to have occurred, the defendant must have acted in a way that is dishonest based on the fact that the state of a man’s mind is a fact. Based on the facts of the sample case, Mr. Eggplant knew of the falsifications as evidenced by the presence of tax receipts and cash till records. Moreover, a consistent cover-up of numbers at 60% shows purposeful deceit intended to make Mr. Manfredi act in a certain way. This is proved further by the fact that in presenting the documents to Mr. Manfredi, Mr. Eggplant did not put any disclaimer that would have alerted Mr. Manfredi to perform tests on his own. As the case satisfies all the conditions necessary to qualify for deceit, it can be concluded that Mr. Manfredi can successfully sue Mr. Eggplant for deceit. Mr. Manfredi can also sue Mr. Eggplant under statutory laws of Australia. In this case, the appropriate Act is the Competition and Consumer Act (2010). The Act expressly prohibits deception in business and the penalties include criminal incarceration. BIBLIOGRAPHY B Cases Ahmed v Addy [2004] EWHC 1465 (QB) AIC v. ITS Testing Services [2006] EWCA Comm. 2122:7 Derry v Peek [1889] App. Cas. 337 Edgington v Fitzmzaurice [1885] 29 Ch D 459 Hedley Byrne v Heller [1964] AC 465  Langridge v Levy 2 [1837] Meeson & Welsby 519 Pasley v Freeman [1789] LR 51 Re Polemis & Furness Withy & Company Ltd [1921] KB 560 Standard Chartered Bank V Pakistan National Shipping Corporation [2002] UKHL 43 C Legislation Competition and Consumer Act 2010 (Cth). Read More