Fraud and misrepresentation, Lecture notes of Contract Law

Download Fraud and misrepresentation and more Lecture notes Contract Law in PDF only on Docsity!

CHAPTER 3

FRAUD AND MISREPRESENTATION

INTRODUCTION

Following from the preceding chapter on voidable contracts which covered coercion

and undue influence, this chapter will cover the vitiating factors of fraud and

misrepresentation which are provided in ss 17 and 18 of the Contracts Act

respectively. The first part of the chapter will cover fraud followed by the second part

on misrepresentation. The third part will cover the effect of, and relief for contracts

entered into due to fraud and misrepresentation.

An important element of s 17 is that the act committed as amounting to fraud is

made with the intent to deceive another party to enter into the contract. The

intent to deceive provided in s 17 on fraud which includes fraudulent

misrepresentation distinguishes s 17 from s 18 which covers innocent and

negligent misrepresentations.

In BP (Sabah) Sdn Bhd V Syarikat Jubrin Enterprise (a partnership firm) & Anor

[1997] 1 LNS 354 , Ian Chin J described fraud as follows:

“fraud implies some base conduct and moral turpitude and a person is

taken to have acted fraudulently or with intent to defraud if he acts

with the intention that some person be deceived and by means of such

deception that either an advantage should accrue to him or injury, loss or

detriment should befall some other person. That is what is known as "fraud" or

"fraudulently."

Sections 17(a), (b) and (c) of the Contracts Act would cover the common law

of fraudulent misrepresentation as defined by the House of Lords in Derry &

Ors v Peek (1889) LR 14 App Cas 337, HL in the judgment of Lord Hershell as

follows:

“First, in order to sustain an action of 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 (i) knowingly, Or (ii) without belief in its truth, or (iii) recklessly, careless whether it

be true or false. Although I have treated the second and third as distinct cases, I think the third

is but an instance of the second, for one who makes a statement under such circumstances can

have no real belief in the truth of what he states. To prevent a false statement being

fraudulent, there must, I think, always be an honest belief in its truth. And this probably covers

the whole ground, for one who knowingly alleges that which is false has obviously no such

belief.”

• Thus, a fraudulent misrepresentation occurs where there is an absence of

honest belief in the truth of the statement made. This would include false

statements made knowingly, or without belief in its truth, or recklessly,

careless whether it is true or false.

• The decision in Derry v Peek & Ors was referred to in Double Acres Sdn Bhd v

Tiarasetia Sdn Bhd [2001]1 AMR 111 where Abdul Malik Ishak J stated:

“… whenever a person causes another to act on a false representation which the maker himself

does not believe to be true, the maker is said to have committed a fraud. It is a simple

statement of the law. The case of Derry v Peek (1889) 14 App Cas 337 is a classic example of

fraud under the common law where the House of Lords in classical style defined fraud as a false

representation 'made (i) knowingly or (ii) without belief in its truth or (iii)fecklessly, careless

whether it be true or false.”

• However, on the facts, it was held that Tiarasetia Sdn Bhd had not produced

any evidence to sustain its claim of fraudulent misrepresentation.

• Fraud as defined in s 17 of the Contracts Act is wider than the common law on

fraudulent misrepresentation as defined in Derry v Peek & Ors, by virtue of s

17(d) "any other act fitted to deceive" and s 17(e) "any such act omission as

the law specially declares to be fraudulent".

Fraud under section 17 Contracts Act

• Section 17 of the Contracts Act lays down five acts which may constitute fraud.

The act must be made with intent to deceive another party or to induce him to

enter into the contract. As provided in the Explanation to s. 19, the fraud must

cause the consent to the contract to render the contract voidable.

Suggestion of untrue fact: s 17(a)

Under s 17(a) of the Contracts Act, the following elements are necessary:

(i) a suggestion as to a fact;

(ii) the fact suggested is not true; and

(iii) the suggestion was made by a person who does not believe it to be true.

• Illustration (a) in 5 19 provides a good example of fraud under s 17(a).5 Section

17(a) was applied by the Federal Court in Kheng Chwee Lian v Wang Tak Thong

[1983] 2 MLJ 320, FC. In this case, the respondent bought a half share in a piece of

land from the appellant and paid the purchase price. Subsequently, the

respondent was induced to sign another agreement under which he was allocated

a smaller portion of land than in the earlier agreement.

A case of fraud by concealment of material facts which induced the other

party to enter into the contract is Tay Tho Bok & Anor v Segar Oil Palm

Estate Sdn Bhd [1996]3MLJ 181. In this case, the plaintiffs entered into an

agreement to purchase 11 pieces of land from the defendant. After paying

a deposit and signing the agreement, the plaintiffs found that part of the

land was being used by the Public Utilities Board for water pipelines and

by Tenaga Nasional Bhd for transmission cables. The plaintiffs argued that

the purchase price ought to be reduced to reflect the presence of these

encumbrances. The defendant refused, and argued that they had no

knowledge of any land acquisition by the Public Utilities Board, and that

they did not make any representation that the transmission lines did not

run across the land. It was the plaintiffs' case that the defendant had

dishonestly concealed relevant material facts from them and had misled

them into believing, that the transmission lines and pipelines were not

within the land concerned.

The High Court held that the acts of the defendant amounted to fraud

within the meaning of s 17 of the Contracts Act. It was found as a fact that

the defendant knew the existence of the transmission lines and pipelines

on the said land prior to the signing of the sale and purchase agreement.

• The Court then went on to determine whether there was active concealment of

the existence of the transmission lines and pipelines on the land by the defendant

prior to the signing of the agreement. It was found that there was such

concealment as the defendant's agents had informed the plaintiffs, when they

went to view the land, that the boundary of the land was up to the transmission

lines and pipelines and those structures were not within the land. The High Court's

finding on fraudulent misrepresentation was upheld by the Court of Appeal.The

plaintiffs had applied to the Court of Appeal for rectification of the agreement to

reflect the reduced purchase price in view that part of the land was taken up by

water pipes and high tension cables. The Court of Appeal did not allow the

plaintiff's application for rectification but held that the agreement was terminated

by the defendant's fraudulent misrepresentation.

No intention to perform promise: s 17(c)

• Under s 17(c) of the Contracts Act, the following elements are necessary:
• (i) a promise was made; and
• (ii) there was no intention to perform the promise.
• Section 17(c) was applied in Datuk Jagindar Singh & Ors v Tara Rajaratnam

[1983] 2 MLJ 127 where the plaintiff had alleged that her land was transferred to

the second defendant (and later to the third defendant) through, inter alia, fraud

perpetuated by the first and second defendants who were her solicitors.

Thus the non-fulfilment of the intention, may be some evidence strong or weak,

according to the circumstances of the individual's case that the intention never

existed at all. (Haisbury's Vol. 26 Para 1517). This is in effect stated in section

17(c) of the Act above [the Contracts Act]” [1983] 2 MLJ 127 at 140.

Section 17(c) was also applied in Jong Chuk v Chong Tung Sang & 5 Ors (Bacom

Enterprises Sdn Bhd— Third Party) [1999] 2 AMR 2381. In this case, the

plaintiff entered into an agreement with the first to fifth defendants to develop

a piece of land owned by the defendants (the first agreement). It was agreed

that the agreement would be binding upon the successors-in-title, assigns and

personal representatives of the parties. The defendants subsequently sold the

land the land to the sixth defendant/third party (6D/TP). The sixth defendant

agreed to be bound by the first agreement. A dispute arose and the plaintiff

contended that 6D/TP had falsely and/or fraudulently represented to the

defendants that it would honour and abide by the first agreement when in fact

it never had any real intention to do so. According to the plaintiff, 6D/TP had all

along a separate plan to develop the said land into a water theme park. The

High Court held that from the very beginning, both the intention and conduct of

the 6D/ TP were fraudulent within the ambit of ss 17(c) and (d) of the Contracts

Act.

Muhammad Kamil Awang J stated:

“I find that there is ample evidence to establish the plaintiff's claim and the first-fifth

defendants' claim that 6D/TP had no intention to be bound by the terms and conditions of

the said agreement from the very beginning as it had at all material times the intention to

convert the said land into a water theme park.

• I hold that 6D/TP's express representation contained in Clause 7 of the second agreement

that it would be bound by the provisions of the said agreement is clearly a false and untrue

statement.”

In Magnum Finance Berhad v Tan Ah Poi & Anor [1997] 4 CLJ Supp 44, the

plaintiff was a finance company and the first defendant was a director of a

company called Milligol Enterprise Sdn Bhd, which carried on business as a

used car dealer. The first defendant approached the plaintiff's branch

manager for a loan to purchase a car from Milligolon hire-purchase. The

manager examined the car and approved the first defendant's loan. The

plaintiff then entered into a hire-purchase agreement with the first

defendant in respect of the car where the plaintiff was described as "the

Owner" and the first defendant as "the Hirer".

Act or omission declared to be fraudulent: s 17(e)

• Section 17(e) applies where the law specifically declares an act or omission to be

fraudulent. It also applies where the disclosure of certain kinds of fact is expressly

required by law.

Whether silence amounts to fraud

• The Explanation to s 17 of the Contracts Act provides:
• Mere silence as to facts likely to affect the willingness of a person to enter into a

contract is not fraud, unless the circumstances of the case are such that, regard being

had to them, it is the duty of the person keeping silence to speak, or unless his silence is,

in itself, equivalent to speech.

• As a general rule, fraud is not committed simply by keeping silent about a certain fact

that could affect the decision or willingness of another to enter into the contract. In

short, silence is not fraud. Illustration (d) explains this general rule.

• A and B, being traders, enter upon a contract. A has private information of a change in

prices which would affect B's willingness to proceed with the contract. A is not bound to

inform B.

• In the above illustration, A's silence, although he has information on the change of

prices that is likely to affect B's willingness to enter into the contract, is not fraud. This is

also an application of the rule of caveat emptor (let the buyer beware) that a seller does

not have the duty to inform a buyer the condition of the goods he is selling. It is on the

buyer to satisfy himself before making a purchase.

• However, there are two exceptions to this general rule, that is, silence can amount to

fraud if (i) there exists a duty for the person to speak; and (ii) the silence, in itself, -is

equivalent to speech.

There exists a duty for person to speak

• The first exception is where the circumstances of the case are such that it is the duty

of the person keeping silent to speak. This can occur in sale and purchase transactions

where the relationship is more than the ordinary relationship of seller and buyer. This

can be seen by contrasting Illustration (a) with Illustration (b).

(a) A sells, by auction, to B, a horse which A knows to be unsound. A says nothing to B

about the horse's unsoundness. This is not fraud in

(b) B is A's daughter and has just come of age. Here, the relation between the parties

would make it A's duty to tell B if the horse is unsound.

• In Illustration (a), the ordinary relationship of seller and buyer does not require A to

inform B about the unsoundness of the horse. A's silence is not fraud. However, in

Illustration (b), as the buyer is A's daughter who has just reached the age of majority,

A has a duty to inform B if the horse is unsound. Unlike Illustration (a) where there is

no such duty to speak, the circumstances in Illustration (b) makes it a duty of A to

speak.

• In Lau Hee Teah v Hargill Engineering Sdn Bhd & A nor [1980] 1 MLJ 145, FC, the

appellant had entered into an agreement to take a loader on hire-purchase as hirer,

with the first respondent as dealer and the second respondent as owner. The first

respondent (as seller) did not inform the hirer of the year of manufacture of the

machine and the fact that it had previously been involved in an accident. The Federal

Court held that this did not amount to misrepresentation as there was no active duty

on the part of the seller to inform the hirer of these matters.

In Karuppannan Chellap pan v Chong Lee Chin [2000] 7 CLJ 265. there

was a statement in the sale and purchase agreement that the building was

sold "free from all encumbrances". The issue was whether this is

tantamount to a fraudulent misrepresentation by the defendant (vendor)

in view of the defendant's non-disclosure of the condition that the

plaintiff, if he purchased the building, would have to remove the window

protrusions at his own expense. The High Court held that the maxim

caveat emptor applied to the plaintiff here. The plaintiff was local

businessman with a restaurant business only a short distance away. He

had viewed the building prior to purchase and must have seen the

window protrusions when he did so. He failed to make inquiries about

them or hire a surveyor to determine the boundary of the building and

whether the protrusions had trespassed into the adjacent lot. A prudent

purchaser of real property will take the precaution to make a survey and if

he omitted to take this precaution he did so at his own risk. Abdul Hamid

Embong J stated:

“The proposition in law is that there is no fiduciary relationship between a vendor and

purchaser ... Thus, an uncommunicative or taciturn vendor cannot be faulted if he failed to

disclose any patent defect such as the window protrusions found in the instant case.”

In Haji Ahmad Yarkhan v Abdul Gani Khan & Anor, AIR 1937 Nagpur 270.

a marriage was arranged between two persons. The father of the groom

conducted the negotiations on behalf of his son and a third person acted

on behalf of the bride. The father later discovered that the prospective

bride suffered from epileptic fits. The issue was whether the third party

was under a duty to disclose this fact. The Court first stated that there was

no fiduciary relationship between the parties:

“In the present case it is impossible to say that there is any fiduciary relationship between

the plaintiff and defendant 1. A man and his wife of course stand in such a relationship to

one another and it is possible a man would be regarded in that light with respect to his

fiancé but two independent persons who negotiate a marriage on behalf of their respective

protégés certainly do not by reason of that fact alone become locked in a position of active

confidence.”

However, the Court found there was a duty to disclose as this type of

contract was a contract uberrimae fidei and stated:

“.. the most common examples [of contracts uberrimafides] are

contracts of insurance, sale, suretyship, releases and compromises. But

contracts to marry also come under this category though the case

law on the subject is meagre and conflicting.”