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Fraudulent Inducement

By Edited Nov 13, 2013 0 0

For there to be grounds for actionable inducement or misrepresentation it requires the plaintiff (a claimant trying to bring about a claim) to establish that it had "reasonably relied" upon promises of future conduct made by another party, with emphasis on the reason criteria.

In essence, to nail a person under fraudulent inducement, we need to prove the following checklist.

1) there was an actual action or omission that would be deemed amounting to statement of fact
2) that was made to the "alleged representee"
3) that would lead to and had led to inducement into contract
the above however is only limited to rescission
4) there is a mens rea (or intention to deceive) required when suing for full damages that would be accountable due from deceit (usually pure economic loss)

We will then examine the separate sections one by one

1) Distinguishing between a statement of fact (that would amount to fraudulent inducement) or a mere puff (like an advertisment that had no effect)

The factual matrix will be taken into consideration by the courts:
They would head slightly towards there being misrepresentation if there was
(i) offer to verify - from Redgrave v Hurd OR
(ii) second hand knowledge - from Smith v Eric S Bush (But only actionable on 1st degree inducement)
(iii) Statement of Intention can become statement of fact under certain qualifications - from Edgington v Fitzmaurice
(iv) Statement of opinion can sometimes become statement of fact - Esso petroleum v Mardon
If there had been (a) duty of care or (b) special knowledge or (c) special relationships, none of these are mutually exclusive, satisfying either one or more than one will do
(v) Actionable Omissions (will be split into separate categories for easier access)

a) Statements of facts are in general deemed to be continuing unless there was express provisions covered in contract
As such, they will usually will be considered Misrepresentation due to falsified fact, and thus have fraudulently induced the inducee (person being deceived).

However it is important to bear in mind that a change of statement in intention is also usually allowed

b) Half truths easily goes straight away into misrepresentation, albeit with qualifications

c) When there is Duty of Disclosure in the cases of Uberrimae fides; which means contracts of utmost good faith for e.g. fiduciary trust

When is it a clear Mere Puff?
i) When it is obviously unreasonable to rely on them
Easy examples can be found in advertising slogans such as "putting a Tiger in your tank"
No one really expects to find such a tiger inside their car petrol tank.

Statements of law is a gray area, we shall not go into it for now

With that we will now move on into the next step:

2) Addressed to plaintiff
This is quite clear cut, if the inducing statement of fact was made towards you, you can prove it simply by saying you heard it, or simply produce and show the offending material.
Remember to make duplicate copies just in case.

3) Inducement into Contract.
How do we conclude if the plaintiff was induced into contracting?

One of the ways is to show valid inducement, in contrast the other side would be trying to show the misstatement was an unimportant reason where there would then be no inducement

What would be considered valid inducement?

It is valid even if there are other reasons to enter as per the case of Edgington v Fitzwilliam
It need not be sole or even predominant reason
And it would work even if the party would have entered into the contract anyway like in Re Leeds Bank

And on the other end, what wouldn't be?
If the inducee regards it as unimportant, although there is a thin line in distinguishing between this and other reasons to enter.
There are cases of this like in Smith v Chadwick 1884; also JEB fasteners v Marks Bloom and Co (1983) where J's claim for damages for M's negligent preparation of accounts of a company J was subsuming, J had not relied on accounts but proceeded with takeover to secure services of its directors

It would also be invalid if the party is unaware of representation as was the case in Horsfall v Thomas 1862;
where a cannon defect was concealed, but was never examined by the buyer.

Another way for inducement to be invalidated is if the inducee knows the representation is untrue which was evinced in Cooper v Tamms 1988

It is also possibly to invalidify it if it can be proven that the person represented to was unaffected by representation as he relies on other information, extracting from Atwood v Small

(Extra) Does an offer for verification change anything?
Generally no - Redgrave v Hurd
where buyer declined an invitation to examine further documents
"the representation once made relieves the party from an investigation... under ordinary circumstances, the mere fact that he does not avail himself of the opportunity of testing the accuracy of the representation made to him will not enable the opposing party to succeed on that ground." i.e. seller should not be allowed accuse buyer of trusting him

(iii) Determining Materiality & Importance { link (i) }
Generally courts will undertake the process of filtering out trivial statements in searching for evidence of inducement,
if deemed Material; the burden of proof would be laid upon Defendant to prove it was either immaterial or unimportant
if not; the burden of proof would lie upon Plaintiff to assert inducement
Generally however, if fraud can be proven, materiality is far less important a reason.

4) Fraudulent Intention

Fraudulent intention in inducement had under Derry v Peek been relatively hard to prove and even unreasonable carlessness is not sufficient.
However once it can be proven that the party had an intention to cheat or deceive, the full range of fraudulent damages is opened up.

5) Remedies for fraudulent misrepresentation / inducement
Damages deceit are recoverable for all losses flowing from the fraud, even if they were not foreseeable by the inducer.
This covers even the most remote of possibilities that eventually happened.
The fraudulent party is liable for any existing flaws and loss in value, regardless of whether it was opportunity cost or losses due to being "locked into" a property, such as shares.
Contributory negligence is no longer taken into account.


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