Fraud has already been incidentally adverted to as vitiating a contract of sale.
As, however, fraud, or deceit, as it is alternatively called, is a word of somewhat vague import, and actionable fraud differs considerably from what is commonly regarded as fraud, some consideration of it in a work of this kind is necessary.
As commonly understood, fraud is a much more heinous offence against morality than the law requires to form the ground of an action for deceit. It appears, however, to be now well settled that some amount of moral delinquency is necessary to support such an action. What amount of moral delinquency is necessary to render a misrepresentation fraudulent was fully discussed in the celebrated case of Derry v. Peck (L.R. appeal cases, H.L. p. 337 foll.), in which it was finally settled that to support an action for deceit there must be an intention to defraud. "No honest mistake, no mistake not prompted by a dishonest intention is fraud" (Derry v. Peck, supra p. 339). A statement "may be inaccurate, yet if the defendants honestly, though mistakenly, believed that it substantially represented the truth, there is no fraud, and an action for deceit will not lie". In other words, there must be moral culpability; and therefore the fact that a statement was unreasonable will not render it fraudulent if a belief in its truth was honestly entertained by the person making it. " To believe without reasonable grounds is not moral culpability, but mental culpability." Of course, a statement may be so utterly irrational, so destitute of all reasonable foundation, as to furnish strong evidence of dishonesty; but the mere fact that it is unreasonable does not per se render it fraudulent.
In giving his opinion in the above case of Derry v. Peck, Lord Fitzgerald refers with approval to the words of Popham, Chief-justice, in a previous case:
"That if I have any commodities which are damaged (whether victuals or otherwise), and I, knowing them to be so, sell them for good, and affirm them to be so, an action upon the case lies for the deceit; but although they be damaged, if I, knowing not that, affirm them to be good, still no action lies, without I warrant them to be good." "Popham", Lord Fitzgerald remarks, " had the reputation of being a consummate lawyer." It should be observed that where a warranty is given, misrepresentation alone, where it forms part of the warranty, even though not fraudulent, might be a sufficient ground for rescinding the contract.
Fraud may conveniently be divided into three kinds: -
(1) Misrepresentations tainted with fraud.
(2) Industrious concealment of defects.
Of these (l) and (2) may be said to constitute positive, (3) negative fraud.
The first kind of fraud has already been alluded to in the foregoing remarks. A false statement of this nature, it would appear, will only amount to a fraud in horse warranty when it forms a material part of the contract, or when, as above noticed, it is made during actual treaty. It may be generally remarked that no statement, fraudulent or otherwise, antecedent to treaty, or made after a bargain has been struck, will affect a warranty.
Examples of the second kind of fraud are the stopping up of " sand cracks", painting over of broken knees, or any similar trick or device to induce a sale or obtain a higher price. A fraud of this kind would vitiate even a sale expressed to be "with all faults".
The third kind of fraud, suppression of material facts, would seem to apply to horse warranty only where the buyer has no power of inspection, and relies upon the integrity of the seller. There it would appear to be of the essence of the contract that the seller shall disclose all material facts. Generally, however, the rule of caveat emptor applies, and the vendor is under no obligation to disclose faults which a purchaser may discover for himself. In Peck v. Gurney (L.R. 6, H.L. 403), which is quoted in Derry v. Peck, Lord Cairns says: "There must, in my opinion, be some active misrepresentation of fact, or, at all events, such a partial and fragmentary statement of fact as that the withholding of that which is not stated makes that which is stated absolutely false"; and Lord Blackburn says: "Even if the vendor was aware that the purchaser thought the article possessed that quality, and would not have entered into the contract unless he had so thought, still the purchaser is bound, unless the vendor was guilty of some fraud or deceit upon him, and a mere abstinence from disabusing the purchaser of that impression is not fraud or deceit; for whatever may be the case in a court of morals, there is no legal obligation on the vendor to inform the purchaser that he is under a mistake, not induced by the act of the vendor" (Smith v. Hughes, L.R. 6, C.P. 597).
Where two or more are concerned in a fraud, it is a criminal offence and amounts to conspiracy. In his "Digest of the Criminal Law" Sir James Stephen remarks (art. 336): "Everyone commits the misdemeanour of conspiracy who agrees with any other person or persons to do any act with intent to defraud the public, or any particular person, or class of persons. . . . Such conspiracy may be criminal, although the act agreed upon is not in itself a crime. I select two of the examples given. A conspiracy to induce a person to buy horses by falsely alleging that they were the property of a private person and not of a horse-dealer (R. v. Kenrick, 5, 2 B. 49), or a conspiracy to induce a man to take a lower price than that for which he had sold a horse by representing that it had been discovered to be unsound, and resold for less than had been given for it (Carlisle's Case, Drar. 337), are conspiracies to defraud."
Fraud, however, as I have already stated, is so many-sided, and assumes so many different forms, that it would be unwise in the extreme to rely upon it as a ground for rescinding a warranty without taking qualified legal advice. The above brief sketch is merely intended to give a general idea of what is meant by actionable fraud, of which even the law itself attempts no definition.