FRAUD AND CONTRIBUTORY NEGLIGENCE

Ian Geering QC and Matthew Parker, 3 Verulam Buildings.

In Standard Chartered Bank v Pakistan National Shipping Corp (No 2) [2003] 1 All ER 173, the House of Lords considered two issues. First, can a person (such as a company director) escape liability for deceit, where he commits a fraud while acting on behalf of another person (such as the company) who is also liable for the fraud? Second, is contributory negligence a defence to a claim in fraud?

Oakprime Ltd was the beneficiary of a letter of credit, issued by Incombank and confirmed by Standard Chartered Bank (SCB). The credit was issued in connection with a sale of Iranian bitumen by Oakprime to a Vietnamese organisation. Pakistan National Shipping Corporation (PNSC) were the shipping agents and shipowners. A condition of the credit was that shipment would take place by 25 October 1993.

Oakprime were unable to ship the goods by 25 October, but Mr Mehra, Oakprime's managing director, persuaded PNSC to issue bills of lading before the goods had been shipped. On 9 November Oakprime presented the false bill of lading and other documents to SCB under cover of a letter signed by Mr Mehra. That letter fraudulently stated that the documents were as required by the credit. SCB, which would not have paid if it had known that the bill of lading had been falsely dated, authorised payment of $US1,155,772, even though the documents had been presented late. SCB sought reimbursement from Incombank. Although it was unaware of the false dating of the bill of lading, Incombank rejected the documents on account of other discrepancies which SCB had not noticed, and SCB was unable to obtain reimbursement.

SCB then sued PNSC, Oakprime and Mr Mehra for deceit. Cresswell J held that they were all liable for damages to be assessed, but Mr Mehra appealed successfully to the Court of Appeal ([2001] 1 All ER (Comm) 1), on the ground that he had made the fraudulent representation on behalf of Oakprime and not personally. SCB appealed to the House of Lords. Before the Lords, Mr Mehra further argued that if he was personally liable, SCB's damages should be reduced under the Law Reform (Contributory Negligence) Act 1945 on account of its contributory negligence. PNSC had unsuccessfully argued the same point before the Court of Appeal (Aldous and Ward LJJ, Evans LJ dissenting).

The House of Lords held that Mr Mehra was personally liable for his deceit. While his representation was made on behalf of Oakprime, and relied upon as a representation of Oakprime, it was nevertheless his representation which he knew to be false. It was also relied upon by SCB as being his representation, because otherwise there could have been no representation and no attribution of it to Oakprime. Mr Mehra was liable for the tort which he had committed.

Different considerations applied to a claim for negligent misstatement. As the House of Lords made clear in Williams v Natural Life Health Foods Ltd [1998] 2 All ER 577, liability in such a case depends on an assumption of responsibility by the defendant. As with contractual liability, an agent (such as a company director) can assume responsibility on behalf of another person (such as the company) without assuming personal responsibility. This reasoning cannot apply to fraud. Mr Mehra was not liable by virtue of his position as a director, but because he had himself carried out the acts of deceit. As with the criminal law (see Meridian Global Funds Management Asia Ltd v Securities Commission [1995] 3 All ER 918), a director cannot escape liability simply because his own acts are also sufficient to fix the company with liability.

The House of Lords also held, affirming the judgment of Mummery J in Alliance & Leicester Building Society v Edgestop Ltd [1994] 2 All ER 38, that contributory negligence is not a defence to a claim in deceit. While SCB had been negligent in making payment on the documents (because it should not have paid even if the bills of lading had been correct), its damages would not be reduced.

For a claimant to be at 'fault', for the purposes of s 1(1) of the 1945 Act, he must be guilty of 'negligence, breach of statutory duty or other act or omission' which gives rise (at common law) to a defence of contributory negligence: see Reeves v Comr of Police of the Metropolis [2000] 3 All ER 897 at 915. There was, however, no trace in the authorities that the negligence of the claimant was a defence to an action for deceit at common law.

As Lord Hoffmann pointed out, a defendant will be liable for misrepresentation (of any kind), even if the claimant could with reasonable diligence have discovered that the representation was false: see, for example, Redgrave v Hurd [1881-5] All ER Rep 77. Indeed, the authorities supported a wider rule. In Edgington v Fitzmaurice [1881-5] All ER Rep 856, the directors of a company were liable for fraudulent misrepresentations in a prospectus for the issue of debentures. That the claimant would not have made any investment, if he had not negligently believed that the debentures were secured upon the company's land, did not affect the directors' liability. Lord Hoffmann noted that 'The law simply ignores the other reasons why he paid.' Similarly, while SCB would not have paid under the credit, if it had not negligently believed that it could obtain reimbursement, this was not a defence to its claim in deceit.

This conclusion is based upon sound policy. Although some injustice might be caused in cases where the damages are in fact paid by an insurer (such as the Solicitors' Indemnity Fund), the answer, in Lord Hoffmann's view, was not to improve the position of fraudsters, but to amend the terms upon which public indemnifiers like the fund are liable.