1902 Encyclopedia > Fraud


FRAUD, in law, is a word of wide import, to which it is difficult to assign any exact definition. The courts have in fact deliberately refrained from defining it, because they did not wish to limit their power of dealing with fraudulent transactions. The word, however, carries its own meaning on the face of it, and there is practically no difference between fraud in the popular and fraud in the legal sense. Any course of conduct that would generally be described as dis-honest, any cheating or deceiving another so that he would be injured thereby, would be fraud in law as in common parlance. In some writers, indeed, there is found an attempted distinction between legal and moral fraud. The acts of a vendor who puffs the goods he sells are, it is said, in so far as they conceal the truth or produce a false impression in the mind of the buyer, fraudulent from an ethical point of view. The law, however, regards them not, holding that the buyer must look to his bargain for himself. Caveat emptor; if he chooses to believe the assertions of the puffer when he might verify the facts for himself, so much the worse for him. An examination of the case, however, shows that there is little or no value in the alleged distinction. The meaning of the maxim is that when the parties are dealing at arm's length, neither is in fact deceived by the exaggerations or depreciations of the other. If actual and intentional misrepresentation is proved the law will avoid the contract, but it will not readily listen to the claim of a man who, having the opportunity of examining what he bought, protests that he purchased on the strength of the vendor's recommendations.

The essential element in fraud is misrepresentation,— producing a false impression on the mind of another—causing him to believe that which is not true. And misrepresentation, to amount to fraud, must also be intentional. There is a wide difference between a false statement believed to be true by the person who makes it and a false statement known to be false by the person who makes it. The latter is clearly fraudulent, and although it would not be safe to set this down as a sufficient definition of fraud, something of this sort will be found to exist in all conduct which is recognized as legally or morally fraudulent. The innocent misrepresentation of facts is, both in law and in common morality, a much less serious thing than wilfil misrepresentation. The latter would include not merely the cases where the statement is known to be false by the person making it, but also the cases in which the statement is made recklessly without any belief one way of the other. He who deliberately makes a statement which he does not know or believe to be true does so at his peril, and if it turns out to be false he will find himself in the same position as if he had known it to be false from the beginning.

It is in reference to contracts that the legal treatment of fraud is of the greatest importance. The broad rule is that uny contract tainted by fraud is void at the option of the party injured. Innocent misrepresentation in the sense above defined has no such effect on a contract, has in general no effect at all unless in certain exceptional cases. Thus if the representation is a condition, the contract is avoided if it turn out not to be true. Or if it is a ivarranty, its falsehood will give a right of action for the breach thereof. And so in certain other cases. But wilful misre-presentation or fraud taints the whole contract. Suppose a contract for the sale of goods between A and B. A, the vendor, makes statements relating to the contract which are not true. If the truth of the statements was made a con-dition of the contract, or if A warranted their truth, he would be responsible to B whether he in point of fact believed the statements to be true or not. In other cases he would be responsible if he knew the statements to be false or made them recklessly without any belief as to their truth or falsehood.

Statements, misrepresentations, or frauds, to be within the rule, must be such as are material to or such as have given rise to the contract. There must be dolus dans locum contractui. A fraudulent concealment or misrepresentation, which had no effect on the mind of the innocent party because the circumstances for which it was prepared did not arise, has no effect on the contract. And the fraud must be the fraud of one of the contracting parties or his agents. False or fraudulent statements, through which A is induced to enter into contract with B, have no effect on the contract if B was in no way privy to them. So also it has been held that the fraud must relate to the same transaction, e.g., a fraudulent misrepresentation made on a former occa-sion by one of the contracting parties has no effect on the contract, although in point of fact it was that which induced the other party to contract.

A contract vitiated by fraud is void at the option of the party injured. He may rescind the agreement if he chooses, or he may affirm it and require the other party to place him in the same position as if the false statement had in point of fact been true. This option he must exercise within a reasonable time after discovering the misrepresen-tation.

Apart from contract, fraud or misrepresentation may give a right of action to the party injured thereby. A typical case is where A is induced by the false representation of B to give credit to C. A has a right of action against B for any damage he may have sustained in consequence.
It may be expedient here to notice the Statute of Frauds (29 Charles II., c. 3)—perhaps the most important piece of legislation in the whole statute-book. Its object is stated to be the "prevention of frauds and perjuries," and its effect is to make writing essential to the validity of many transactions. The 'most important sections are those relating to contracts, viz., the 4th and the 17th, almost every word of which has been the subject of numerous decisions. By the 4th section no action shall be brought on the contracts therein mentioned unless the agreement, or some note or memorandum thereof, shall be in writing and signed by the party to be charged therewith, or some other person thereunto by him lawfully authorized. The contracts referred to are the following:—(1) any special promise by an exe-cutor or administrator to answer damages out of his own estate; (2) any special promise to answer for the debt, default, or miscarriage of another person; (3) any agreement made upon consideration of marriage; (4) any contract or sale of lands, tenements, or hereditaments, or any interest in or concerning them; and (5) any agreement that is not to be performed within the space of one year from the making thereof. It will be noticed that this section does not make the contract null and void, but only unactionable. The 17th section refers to sales of goods for the price (or value) of £10 and upwards, which are " not allowed to be good" unless some memorandum of the bargain has been made in writing (see CONTRACT). Arrangements by which an insolvent debtor agrees to give to one of his creditors a preference over the others without their knowledge or consent are known as fraudulent pre-ferences, and are null and void.

Fraud can hardly be said to be under that name an offence known to the criminal law; the vagueness of the conception renders it impossible to treat fraud per se as a crime. But there are specific offences (both at common law and by statute) of which fraud is the gist, and in dealing with these the courts have had some little difficulty in drawing the line between criminal and non-criminal fraud. At common law it would appear that only those cheats or frauds are indictable which amount to "fraudulently obtain-ing the property of another by any deceitful and illegal practice or token (short of felony) which affects or may affect the public " (Russell On Crimes, vol. ii.). Chief Justice Cockburn in one case stated, as the result of the authorities, that " if a person in the course of his trade, openly and publicly carried on, were to put a false mark upon an article so as to pass it off as a genuine one, when in fact it was only a spurious one, and the article was sold and money obtained by means of that false mark or token, that would be a cheat at common law." On the other hand, cheats by means of a bare lie or false affirmation in a private transaction are not indictable at common law ; e.g., when a merchant falsely pretended that a certain parcel of gum was gum seneca, whereas it was an inferior and less valuable gum, the fraud was held not indictable. And in another case where the defendant was charged with obtaining money from another by a falsehood, Chief Justice Holt said, " Shall we indict one man for making a fool of another 1 Let him bring his action." Frauds affecting the crown would be indictable, and so would any cheat aimed at the general public, e.g., when an impostor maims himself to have a pretence for asking charity. Russell considers that the publication of false news likely to produce any public detriment would be criminal.

The principal criminal enactment against frauds is 24 and 25 Vict., c. 96, §§ 75-90. By § 88, " whoever shall by any false pretence obtain from any other person any chattel, money, or valuable security, with intent to defraud, shall be guilty of a misdemeanour." Other sections deal with frauds by agents, bankers, or factors, by trustees, by directors of companies (keeping fraudulent accounts, pub-lishing false statements, &c). Other enactments are the statutes of Elizabeth against fraudulent conveyances (13 Eliz,, c. 5, and 27 Eliz., c. 4); 9 Geo. IL, c. 5 (persons pretending to exercise witchcraft, tell fortunes, &c.); 25 and 26 Vict., c. 88 (forgery, trade marks, &c.) ; the Debtors Act, 1869 (fraudulent debtors, &c).

The distinction between private and public frauds does not hold in the law of Scotland. Thus if a person undertake to supply an article according to sample, or an article which has been inspected and ordered, and intentionally send a substance which is not the thing contracted for at all, or which, though containing some proportion of the article ordered, is an adulterated mixture, he is guilty of falsehood, fraud, and wilful imposition (Macdonald's Criminal Law of Scotland). This passage may be compared with the private frauds cited above. (E. E.)

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