character and value of the property to be acquired by a company for the purposes of its operations (y), the privileges and position secured to it, the amount of capital (≈), or the amount of shares already subscribed for (a), a person who has agreed to take shares on the faith of such representations, and afterwards discovers the truth, is entitled to rescind the contract and repudiate the shares, if he does so within a reasonable time and before a winding-up has given the company's creditors an indefeasible right to look to him as a contributory. For full information on this subject the reader is referred to Lord Justice Lindley's treatise (b). There is likewise a fiduciary relation between a promoter Duty of and the company in its corporate capacity, which imposes to com promoter on the promoter the duty of full and fair disclosure in any pany. transaction with the company, or even with persons provisionally representing the inchoate company before it is actually formed (c). Promoters who form a company for the purpose of buying their property are not entitled to deal with that company as a stranger (d). They must provide it with "a board of directors who can and do exercise an independent and intelligent judgment on the transaction" (e). The Companies Act, 1867, s. 38, makes it the duty of promoters of a company to disclose in the prospectus any previous contract entered into by the company or the (y) Reese River Silver Mining Co. v. Smith, L. R. 4 H. L. 64, affg. B. c. nom. Smith's ca. 2 Ch. 604. (z) Central Ry. Co. of Venezuela v. Kisch, supra. (a) Wright's ca. 7 Ch. 55; cp. Moore & De la Torre's ca. 18 Eq. 661. (b) Lindley on Partnership, 2. 935, 1424. And see American Law Review, N. S. vol. 1, p. 177 (March, 1880), "Effect of Fraud on Subscriptions to Stock," by Seymour D. Thompson, where English and American authorities are very fully collected. Mere communication to (c) New Sombrero Phosphate Co. (d) Erlanger v. New Sombrero Phosphate Co. 3 App. Ca. at p. 1268. (e) Ib. at pp. 1229, 1236, 1255, Contract to marry. promoters; in default of which the prospectus is deemed "fraudulent on the part of the promoters, directors, and officers of the company knowingly issuing the same" as regards any one taking shares on the faith of the prospectus and without notice of the contract. This creates no duty on the part of any one who was not a promoter at the date of the contract (f), nor towards any one but shareholders (g) and it seems the right it gives the shareholder is to bring an action of deceit against the delinquent personally, and not to be released from his contract (ƒ). The contracts mentioned in this very loosely drawn enactment include not only contracts binding or intended to bind the company itself, but all contracts involving dealings with company's shares or assets which, if known to a prudent man, would be material to determine his judgment as to taking shares (h). It is not quite clear how far the obligations of promoters to shareholders, under this clause or otherwise, can be waived by express notice in the prospectus. Special terms intended to have that effect, and presumably settled under good advice, are however in frequent use. the Thus much of the classes of contracts to which special duties of this kind are incident. The absence of any such duty in other cases is strongly exemplified by the contract to marry. Here there is no obligation of disclosure, except so far as the woman's chastity is an implied condition. The non-disclosure of a previous and subsisting engagement to another person (i), or of the party's own previous insanity (k), is no answer to an action on the promise. If promises to marry are to give a right of action, one would think the contract should be treated as one requiring the utmost good faith: but such are the decisions. (f) Gover's ca. 20 Eq. 114, 1 Ch. D. 182. (g) Cornell v. Hay, L. R. 8 C. P. 328. (h) Twycross v. Grant (C. A.), 2 C. P. D. 469, Sullivan v. Mitcalfe (C. A.), 5 C. P. D. 455 (with con- (k) Baker v. Cartwright, 10 C. B. N. S. 121. Marriage itself is said not to be avoided even by actual fraud (7), but the reasons for this are obviously of a different kind nor is a marriage settlement rendered voidable by the wife's non-disclosure of previous misconduct (m). Reasons have already been given for abstaining from the attempt to state a more general rule for the treatment of contracts entered into by one party in consequence of representations made by the other which were not true in fact, but not known to be untrue by the person making them. We proceed to deal with the question of fraudulent misrepresentation, deceit, or fraud in the strict and only proper sense. PART 2.-FRAud. sentation. But not always: as when a Fraud generally includes misrepresentation. Its specific Fraud mark is the presence of a dishonest intention on the part includes generally of him by whom the representation is made. In this case misreprewe have a mistake of one party caused by a representation of the other, which representation is made by deliberate words or conduct with the intention of thereby procuring consent to the contract, and without a belief in its truth. There are some instances of fraud, however, in which one can hardly say there is a misrepresentation except by a forced use of language. It is fraudulent to enter into a contract with the design of using it as an instrument of a colwrong or deceit against the other party. Thus a separation lateral wrongful deed is fraudulent if the wife's real object in consenting or or unlawful purprocuring the husband's consent to it is to be the better able to renew a former illicit intercourse which has been without intention concealed from him. "None shall be permitted to take of advantage of a deed which they have fraudulently induced forming (1) Swift v. Kelly, 3 Knapp, P. C. 257, 293: but Lord Brougham's language is much too wide; as to the point actually decided see p. 519 below. (m) Evans v. Carrington, 2 D. F. J. 481. It is there said however that non-disclosure of adultery would be enough to avoid a separation deed. contract is made with pose, or it. Right of another to execute that they may commit an injury against morality to the injury and loss of the party by whom the deed is executed" (n). So it is fraud to obtain a contract for the transfer of property or possession by a representation that the property will be used for some lawful purpose, when the real intention is to use it for an unlawful purpose (o). It has been said that it is not fraud to make a contract without any intention of performing it, because peradventure the party may think better of it and perform it after all: but this was in a case where the question arose wholly on the form of the pleadings, and in a highly technical and now happily impossible manner (p). And both before and since it has repeatedly been considered a fraud in law to buy goods with the intention of not paying for them (7). Here it is obvious that the party would not enter into the contract if he knew of the fraudulent intention but the fraud is not so much in the concealment as in the character of the intention itself. It would be ridiculous to speak of a duty of disclosure in such cases. Still there is ignorance on the one hand and wrongful contrivance on the other, such as to bring these cases within the more general description of fraud given in Ch. VIII. p. 391, above. The party defrauded is entitled, and was formerly enrescinding fraudulent titled at law as well as in equity, to rescind the contract. contract. "Fraud in all courts and at all stages of the transaction has been held to vitiate all to which it attaches" (†). (n) Evans v. Carrington, 2 D. F. J. 481, 501; cp. Evans v. Edmonds, 13 C. B. 777, where, however, express representation was averred. (0) Feret v. Hill, 15 C. B. 207, 23 L. J. C. P. 185, concedes this, deciding only that possession actually given under the contract cannot be treated as a mere trespass by the party defrauded. (p) Hemingway v. Hamilton, 4 M. & W. 115. (a) Ferguson v. Carrington, 9 B. & C. 59; Load v. Green, 15 M. & W. 216, 15 L. J. Ex. 113; White v. Garden, 10 C. B. 919, 923, 20 L. J. C. P. 166; Clough v. L. & N. W. Ry. Co. L. R. 7 Ex. 26; Ex parte Whittaker, 10 Ch. 446, 449, per Mellish, L.J.; Donaldson v. Farwell, 3 Otto (93 U. S.) 631. But it is not such a "false representation or other fraud" as to constitute a misdemeanor under s. 11, sub-s. 19 of the Debtors Act, 1869; Ex parte Brett, 1 Ch. D. 151. (r) Per Wilde, B. Udell v. Atherton, 7 H. & N. at p. 181. of fraud. We shall now consider the elements of fraud separately: Elements and first the false representation in itself. It does not matter whether the representation is made by express words or by conduct, nor whether it consists in the positive assertion or suggestion of that which is false, or in the active concealment of something material to be known to the other party for the purpose of deciding whether he shall enter into the contract. These elementary rules are so completely established and so completely assumed to be established in all decisions and discussions on the subject that it will suffice to give a few instances. of fraudu There may be a false statement of specific facts: this Examples seldom occurs in a perfectly simple form. Canham V. lent repreBarry (s) is a good example. There the contract was for sentation. the sale of a leasehold. The vendor was under covenant with his lessor not to assign without licence, and had ascertained that such licence would not be refused if he could find an eligible tenant. The agreement was made for the purpose of one M. becoming the occupier, and the purchaser and M. represented to the vendor that M. was a respectable person and could give satisfactory references to the landlords, which was contrary to the fact. This was held to be a fraudulent misrepresentation of a material fact such as to avoid the contract. A more frequent case is where a person is induced to acquire or become a partner in a business by false accounts of its position and profits (t). Or the representation may be of a general state of things: thus it is fraud to induce a person to enter into a particular arrangement by an incorrect and unwarrantable assertion that such is the usual mode of conducting the kind of business in hand (u). sentation of existing facts will (s) 15 C. B. 597; 24 L. J. C. P. 100. (t) E. g. Rawlins v. Wickham, 3 De G. & J. 304. The cases where contracts to take shares have been P. How far it must be a repre- held voidable for misrepresentation (u) Reynell v. Sprye, 1 D. M. G. 680. L L |