Today, businesses are blooming in line with the globalization of trade. However, let's face it. The advancement and expansion of business opportunities have triggered greater competition, forcing the players in the industry to be more innovative to survive and remain as competent players in the industry. More often than not, business engagements and corporate transactions are entered into with the ultimate goal of generating proceeds and profits. However, reality may not be as what you want it to be.
Imagine entering into an engagement with a view of making profits just to realize that the engagement is not as promising as it seems or even worse, discovering that you have been deceived into entering into such transaction through the conveyance of false information. What recourse would you have in such situation? In this article, we will provide you with an insight on the essence of corporate fraudulent misrepresentations and the damages claimable in the event the same is established.
Establishing Fraudulent Misrepresentation
Fraudulent misrepresentation is grounded upon the tort of deceit and it invokes damages in contract. Fraudulent misrepresentation transpires when a false representation is made by a person (i.e. the defendant) who knows it to be untrue, or who has no belief that it its true, or who is reckless as to its truth.1 It is a product of a hybrid of "fraud" and "misrepresentation" wherein the court would determine the existence of such fraudulent misrepresentation by looking at the surrounding circumstances so as to determine the intent and/or state of mind of the person who have made such representation.
When commencing a legal action on the ground of fraudulent misrepresentation, it is important to specify with certainty that the action is for "fraudulent misrepresentation". This is because the courts would refuse to hear a matter which has not been specifically pleaded. This is evidenced by the Court of Appeal case of Bounty Dynamics Sdn Bhd (formerly known as Media Development Sdn Bhd) v Chow Tat Ming & 175 Ors2, whereby the respondents had failed to specify with certainty as to whether their action for misrepresentation was one of negligent misrepresentation or fraudulent misrepresentation.
In this case, the court held that the respondents would not be allowed to rely on any arguments relating to fraudulent misrepresentation as they had failed to plead fraudulent misrepresentation. In addition to the preceding, the fraudulent misrepresentation alleged must also be particularized in the pleadings, failure of which would result in the court holding that the claims unsustainable and thereby dismissing the claim.
Case laws have established that there are five (5) elements that must be pleaded and proved in establishing fraudulent misrepresentation, namely:
- a representation of fact made by words or by conduct;
- the representation must be made with knowledge that it is false (it must be willfully false or at least made in the absence of any genuine belief that it is true or reckless);
- the representation must be made with the intention that it should be acted upon by the claimant, or by a class of persons which will induce the claimant, in the manner which resulted in damage to him;
- it must be proven that the claimant acted upon the false statements; and
- it must be proven that the claimant has sustained damage by doing so.3
The Malaysian Federal Court has in the case of ALW Carworkshop Sdn Bhd V AXA Affin General Insurance Bhd4 adopted the test of fraudulent misrepresentation as enunciated by the Privy Council in the case of Baron Akerheilm v Rolf De Marc5, as follows:
"The question was not whether the defendant in any given case honestly believed the representation to be true in the sense assigned to it by the court on an objective consideration of its truth or falsity, but whether he honestly believed the representation to be true in the sense which he understood it albeit erroneously, when it was made".
Burden of Proof and Standard of Proof
It is settled law that the burden of proof rests throughout the trial on the party on whom the burden lies.6
The burden of proving that there was in fact fraudulent misrepresentation made, lies upon the person who asserts the existence of such facts. Therefore, the burden of proving the existence of fraudulent misrepresentation would initially lie upon the plaintiff/claimant. Where a party on whom the burden of proof lies has discharged it, then the evidential burden shifts to the other party. The parties may discharge the burden by giving oral evidence, adducing documentary and/or other relevant evidences, cross-examination witnesses of the other party or by a combination of the different methods.
There have been some debates as to the correct standard or proof that shall be applied in a case involving fraudulent misrepresentation. A perusal of case laws would show that there have been different attempts made to convince the courts to either apply the "beyond reasonable doubt" or the "on the balance of probabilities" standard of proof in respect of fraudulent misrepresentation and the courts have in different occasions decided in favour of both sides of the arguments.
However in 2017, the Federal Court has in the case of Ling Peek Hoe & Anor v Ding Siew Ching and Another Appeal7 settled the issue. In the case, the Federal Court had among others, granted the appellants with leave to appeal on the question of whether the Court of Appeal was right to adopt the standard of proof of 'beyond reasonable doubt' in the instant case of fraudulent misrepresentation. The Federal Court ruled that the appellants were only required to prove their case on the balance of probabilities. As such, as it stands, the plaintiff/claimant would have to proof their claim for fraudulent misrepresentation on a balance of probabilities.
The object of damages for an action for fraudulent misrepresentation, is to place the claimant in the position he would have been had he not been induced. Where a case of fraudulent misrepresentation is established, the party induced into entering the falsely represented transaction may apply to the court for a decree of rescission and also to an award of damages. The option for the claimant to rescind the agreement is a remedy made available pursuant to section 19 of the Contracts Act 1950. Damages are available in addition to rescission because an action for fraudulent misrepresentation is grounded upon the tort of deceit.
Due attention however needs be given to the explanation as provided under the section as it sets out the requirement for the misrepresentation to have induced the contract and as such is somehow linked to the burden of proof. It is for the claimant to demonstrate that the misrepresentation had indeed induced him to enter into the agreement. Where the defendant has made a material misrepresentation calculated to induce the plaintiff to act as he or she has acted, and where the loss is consistent with the plaintiff having acted on the misrepresentation as alleged, the legal burden of proof shifts to the defendant to prove that the plaintiff did not rely, at all, on the misrepresentation. One should also be mindful of the exception provided under section 19 of the Contracts Act wherein the law specifies that the option of rescinding the agreement would not be available if the if the party whose consent was so caused had the means of discovering the truth with ordinary diligence.
Lord Denning has in the case of Doyle v Olby8 established four main points relevant to the measure of damages for fraudulent misrepresentation, as follows:
- the measure of damages where a contract has been induced by fraudulent misrepresentation is reparation for all the actual damage directly flowing from (i.e., caused by) entering into the transaction;
- in assessing such damages, it is not an inflexible rule that the plaintiff must bring into account the value as at the transaction date of the asset acquired;
- damages for deceit are not limited to those which were reasonably foreseeable; and
- the damages recoverable can include consequential loss suffered by reason of having acquired the asset.
Lord Denning has further in his judgment enunciated that the object of damages is to compensate the plaintiff for all the loss he has suffered, so far, again, as money can do it. His Lordship has stated that in fraud, the defendant is bound to make reparation for the actual damages directly flowing from the fraudulent inducement.
The above have been cited with approval in the Malaysian Court of Appeal case of Kee Wah Soong v Yap Boon Hwa and Anor9 and in the Court of Appeal case of Sim Thong Realty Sdn Bhd v Teh Kim Dar @ Tee Kim10. Relying on the aforementioned, the victim of fraudulent misrepresentation shall be entitled to compensation for all the actual loss, including consequential loss, directly flowing from the transaction induced by the deceit, subject to the victim substantiating the same.
With the option of rescinding and claiming for damages in the event of fraudulent misrepresentation, it is for the victim corporation to make a business decision whether to proceed with such cause of action by considering the evidences available as well as the amount of damages claimable. We trust that we have provided an insight on the essence of fraudulent misrepresentation in this article.
1. (1995) Clerk and Lindsell on Torts (17th Ed.) at para 14-01.
2.  1 MLJ 507
3. Yeohata Machineries Sdn Bhd & Anor v Coil Master Sdn Bhd & Ors  6 MLJ 810
4.  4 MLJ 561
5.  AC 789
6. Tan Geok Khoon & Gerard Francis Robless v Paya Terubong Estate Sdn Bhd  2 MLJ 672;
7.  5 MLJ 385
8.  2 All ER 119
9.  MLJU 1289
10.  3 MLJ 460
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.