UK: The House of Lords Considers Fraudulent Misrepresentation

Last Updated: 30 May 2003

The recent House of Lords decision in Standard Chartered Bank v Pakistan National Shipping Corporation & Others [2003] 1 All ER 173 determined, firstly, that contributory negligence cannot be raised as a defence to a claim for fraudulent misrepresentation so as to reduce an award of damages under the Law Reform (Contributory Negligence) Act 1945, and, secondly, that a director can be personally liable for fraudulent misrepresentations which he made on behalf of a company.

The factual background to the case concerned a letter of credit issued by Incombank in connection with a sale of bitumen by Oakprime Limited and confirmed by Standard Chartered Bank (SCB). It was a condition of the credit that the bitumen had to be shipped no later than 25 October 1993. Contrary to the condition, the bitumen was not shipped on or before that date. In order to obtain payment under the letter of credit, the Managing Director of Oakprime, Mr Mehra, arranged with the shipping agents (Pakistan National Shipping Corporation (PNSC)) that they would issue the bill of lading backdated to 25 October when in fact it was issued on 8 November before the bitumen was shipped. On 9 October, Oakprime presented the bill of lading and other documents to SCB under cover of a letter from Oakprime signed by Mr Mehra. The letter stated falsely that (with one omission) the documents were all those required by the credit. If SCB had known the bill of lading was falsely dated, it would not have paid against the letter of credit. The omitted document was presented a few days later and certain other documents which had shown discrepancies from the terms of the credit were resubmitted after the final date for negotiation of the credit had passed. Although SCB knew that these documents had been presented late, it waived late presentation and made payment of US$1,155,000 a few days later. SCB then sought reimbursement from Incombank, incorrectly representing to them that the relevant documents were presented before the expiry date of the credit. Incombank, though unaware of the incorrect representation, nonetheless rejected the documents on account of other discrepancies with the documents. SCB was therefore unable to obtain reimbursement. SCB subsequently commenced proceedings against PNSC, Oakprime and Mr Mehra for deceit.

On the first issue of whether Mr Mehra could raise a defence of contributory negligence to SCB’s claim for fraudulent misrepresentation, Lord Hoffman, who delivered the leading judgment, considered section 1(1) of the 1945 Act and the definition of "fault" in section 4:

"1(1) Where any person suffers damage as the result partly of his own fault and partly of the fault of any other person or persons, a claim in respect of that damage shall not be defeated by reason of the fault of the person suffering the damage, but the damages recoverable in respect thereof shall be reduced to such extent as the court thinks just and equitable having regard to the claimant’s share in the responsibility for the damage… 

4 … "fault" means negligence, breach of statutory duty or other act or omission which gives rise to a liability in tort or would, apart from this Act, give rise to a defence of contributory negligence."

He considered that the definition of "fault" was divided into two limbs, one of which was applicable to defendants and the other to claimants. In the case of defendants, "fault" means "negligence, breach of statutory duty or other act or omission" which gives rise to a liability in tort. In the case of claimants, "fault" means "negligence, breach of statutory duty or other act or omission" which gives rise to a defence of contributory negligence at common law. Accordingly, Lord Hoffman held that a claimant’s conduct could not constitute "fault" within the meaning of the 1945 Act unless the conduct also gave rise to a defence of contributory negligence at common law.

Lord Hoffman held that SCB’s conduct had been negligent: SCB had been careless in making payments against documents which, it knew or ought to have known, did not comply with the terms of the letter of credit. However, Lord Hoffman held that where a defendant’s fraudulent representation is relied upon and induces the claimant to act as he did, the law takes no account of other reasons, including the claimant’s negligence, which contributed to the claimant’s decision to so act. He stated that this rule was "based upon sound policy. It would not seem just that a fraudulent defendant’s liability should be reduced on the grounds that, for whatever reason, the victim should not have made the payment which the defendant successfully induced him to make."

On the second issue of whether a director can be personally liable for fraudulent misrepresentations which he made on behalf of a company, Lord Hoffman regarded it as irrelevant that Mr Mehra had made the representation on behalf of Oakprime and that the representation had been relied upon as a representation by Oakprime. Mr Mehra was not being sued for Oakprime’s tort, but he was being sued personally for his own tort. All the elements of the tort were proved against him. Therefore, the fact that under the law of agency Mr Mehra’s representation and knowledge would also be attributed to Oakprime, while clearly relevant to any action against Oakprime, did not detract from the fact that they were his representation and his knowledge, and that therefore Mr Mehra had personally committed a fraud.

Comment

The House of Lords’ decision contains a number of important principles for financial institutions which have been innocent victims of fraudulent misrepresentations. Innocent parties will not suffer a reduction in damages for fraudulent misrepresentation even where they themselves have been negligent in their conduct. The policy considerations for regarding fraud as different to negligence have therefore been upheld.

Secondly, the case should issue a clear message to directors tempted to make fraudulent misrepresentations that they will be unable to hide behind the corporate veil in seeking to evade liability for their own fraud.

Thirdly, the case clarifies that where an innocent party has been the victim of fraudulent misrepresentations, that party will be able to pursue both the maker of the fraudulent misrepresentation and the company on whose behalf the misrepresentation was made. This will be particularly beneficial where there is a doubt as to the company’s ability to meet any judgment against it but the director has personal assets to recover against.

Article by Christa Band

© Herbert Smith 2003

The content of this article does not constitute legal advice and should not be relied on as such. Specific advice should be sought about your specific circumstances.

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