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Fraud or Error: A Thought Experiment?

Document Cited authorities 24 Cited in Related
Vincent
Date01 September 2013
Pages343-369
AuthorDot Reid,Hector MacQueen
DOI10.3366/elr.2013.0171
Published date01 September 2013
INTRODUCTION

Students of the Scots law of contract over the last fifty years have been all too familiar – or, in some cases, not familiar enough – with the conundrum presented by the need to reconcile the differing results of the seemingly all but identical cases of Morrisson v Robertson1

1908 SC 332.

and MacLeod v Kerr.2

1965 SC 253.

 In both a plausible rogue pretending to be someone else thereby tricked the owner of goods into selling them to him: in the first case, on the credit of the party for whom the rogue was pretending to act; in the second, by paying with a cheque from a stolen chequebook which was thereafter dishonoured. In both cases the rogue sold the goods on to a good faith third party. Again in both cases the rogue was later convicted of the crime of theft. The question in our two subsequent civil cases was whether the original owner/seller or the good faith third party was entitled to the goods. In Morrisson it was held that the original owner/seller had acted under an essential error as to the identity of his buyer, that the contract was accordingly void, that the rogue had therefore never acquired title to the goods and so neither did the good faith third party. In MacLeod, by contrast, the original owner/seller's error as to his buyer's identity was held not to be essential, that he was rather the victim of fraud, that the contract was voidable and that, it not having been avoided at the time the rogue sold to the good faith third party, the latter obtained good title to the goods

Although clearly the cases present major issues for the law of property as much as for the law of contract,3

On the property dimensions see D Reid, Fraud in Scots Law (PhD, University of Edinburgh, 2012) 24–31, and text accompanying nn 148–152 below.

our primary focus here will be on the questions which they raise in the latter. What is the distinction between fraud and error as grounds of invalidity in that context? It is evident that the two concepts overlap considerably in substance. If fraud is about the deception of one by another, as the classic Scottish definitions of it agree,4

Erskine, Inst III.1.16; Bell, Prin § 13.

 then the victim is always somebody who labours under error. One distinction which our cases suggest is that fraud in general only makes a contract voidable, while it is void if the error is in “the essentials” (i.e. as to the identity of the other contracting party, the contract's subject matter, the price, the quality of the subject matter, and the nature of the contract). So fraud may graduate, so to speak, into essential error, and this is what happened in Morrisson. However, there is long-standing uncertainty as to whether or not an error which is indeed in the essentials always makes a contract void or if there are limits to that proposition, for instance the suggestion that the error must also be “justus et probabilis”.5

J J Gow, “Mistake and Error” (1952) 1 ICLQ 472 at 478; T B Smith, A Short Commentary on the Law of Scotland (1962) 832.

McBryde has coined the phrase “error plus” to indicate that in modern Scots law error requires an additional factor for it to be legally relevant: it must be induced, taken advantage of, mutual (that is, shared) or part of a gratuitous transaction.6

W W McBryde, The Law of Contract in Scotland, 3rd edn (2007) paras 15–16 and 15–23.

The present article is concerned with the first of those factors, induced or caused error, which has considerably enlarged the scope of the doctrine and is probably the largest sub-category of the modern law of error. In this guise, error need not be in the essentials and where a material error is induced by another party's misrepresentation and causes the victim to enter the contract, that contract may be voidable. The misrepresentation need not be fraudulent; there is said to be a category of “innocent” misrepresentation. But if a fraudulent misrepresentation induces a party to contract, it seems to be the law that the victim has a free choice as to whether the remedy of reduction is based on fraud simpliciter or on error induced by misrepresentation. One view is that, as a result of these developments, “the law on error induced by misrepresentation has overtaken the old-fashioned concept of annulment of a contract on the ground of fraud per se”.7

H L MacQueen and J Thomson, Contract Law in Scotland, 3rd edn (2012) para 4.27.

This has however created a structural anomaly for commentators on contract law. The result of having a category of induced error means that misrepresentation has to be divided into two basic categories: intentional misrepresentation and unintentional misrepresentation (whether negligent or “innocent”). The former is part of the law of fraud; the latter part of the law of error. So in Gloag's classic work on contract law, first published in 1914, and which reached a second edition in 1929, error was treated first in one chapter, followed by another on misrepresentation and concealment and then another on fraud (which included facility and circumvention along with undue influence).8

W M Gloag, The Law of Contract (1914) chs XXII-IV; 2nd edn (1929) chs XXVI-VIII.

The attempt to treat each separately is only partly successful: his discussion of error and fraud is laced with the concept of misrepresentation; that of misrepresentation frequently digresses into fraud and error, and includes an explanation of essential error.9

Gloag, Contract, 2nd edn (n 8) 472.

 Modern commentators are faced with no lesser difficulty.10

See McBryde, Contract (n 6) paras 14–10–14–18 (fraud) and paras 15–43–15–87 (induced error); W M Gloag and R C Henderson, The Law of Scotland, 13th edn by H L MacQueen et al (2012) paras 7.13–7.16 (fraud) and paras 7.33–7.38 (induced error); MacQueen and Thomson consider misrepresentation only as part of the law of error, see MacQueen and Thomson, Contract (n 7) paras 4.57–4.66.

 Moreover, errors induced by fraudulent or negligent misrepresentations are thus imported into the law of delict for damages can be claimed; innocent misrepresentations, by contrast, only have contractual effect.11

In English law damages may be awarded for any type of misrepresentation: Misrepresentation Act 1967 s 2(2).

The preference for a taxonomy based on fraud or on error brings into sharp contrast the way in which civil and common law jurisdictions approach the question.12

K Zweigert and H Kötz, An Introduction to Comparative Law, 3rd edn (tr T Weir, 1998) 411–424; R Sefton-Green, “Comparative conclusions”, in R Sefton-Green (ed), Mistake, Fraud and Duties to Inform in European Contract Law (2005) 369 at 380–386; H Beale, Mistake and Non-Disclosure of Facts: Models for English Contract Law (2012); DCFR Arts II-7:201–205.

At the level of broad generalisation the former focuses on the error itself, the latter on how the error was caused; the former protects the free intention of the contracting parties, the latter punishes the actions of the one who induced the error; the former has a broad and more subjective concept of error; the latter an expansive doctrine of misrepresentation, which has a tortious character, and a restrictive category of mistake.13

On the historical development see C MacMillan, Mistakes in Contract Law (2010).

Peter Stein noted 55 years ago that Scots law was in a muddle in this regard because it had failed to make a conscious structural choice: 14

P G Stein, Fault in the Formation of Contract in Roman Law and Scots Law (1958) 191–192.

…instead of making a deliberate choice, the exponents of Scots law adopted a muddled mixture of the two, taking the rules laid down in English cases, and clothing them in pseudo-civilian dress.

 In a sophisticated modern legal system classification is important and ought to be discernible with more certainty than is presently the case. This article will offer an explanation of how the current taxonomy came about and will propose a thought experiment, namely that all misrepresentations leading to an error ought to be part of the Scots law of fraud THE HISTORICAL SCOPE OF FRAUD<xref ref-type="fn" rid="fn15"><sup>15</sup></xref><fn id="fn15"><label>15</label><p>A more detailed analysis is given in Reid, <italic>Fraud</italic> (n 3) ch 2.</p></fn>

Despite the fact that fraud has always been with us, there remain doubts about its definition and its classification. In modern Scots law fraud is most commonly defined, using Erskine's formulation, as “a machination or contrivance to deceive”,16

Erskine, Inst III.1.16.

itself a rendition of the classic or Labeonic definition of dolus malus in Justinian's Digest: omnem calliditatem fallaciam machinationem ad circumveniendum fallendum decipiendum alterum adhibitam.17

D.4.3.1.2.

 The primary meaning of fraud, therefore, involves intentional deceit. However, Erskine's definition was always incomplete for there is evidence that in the seventeenth and eighteenth centuries the Scottish courts significantly extended the scope of fraud to cover fact scenarios where deceit was not present but fraud could nevertheless be presumed. The doctrine of presumptive fraud was broad and well-developed, and was applied in a wide range of circumstances in which one party gained an advantage by causing (intentionally or unintentionally) lesion to another

One manifestation of presumptive fraud is to be found in the use of the Latin maxim culpa lata dolo aequiparatur,18

Reid, Fraud (n 3) 48–65.

the effect of which was to deem as fraud (dolus) conduct which did not meet the delictual standard of intentional deceit. It most commonly occurred in relation to agency and the behaviour of fiduciaries (where it still has some currency in modern law19

Ferguson v Paterson (1900) 2 F (HL) 37; see Discussion Paper on Breach of Trust (Scot Law Com DP No 123, 2003) paras 3.23–3.30.

). But it was also used in a wider context as a means of attributing liability for fraud where behaviour was considered “unwarrantable”,20

Scot v Cheisly (1670) Mor 4867; Oliver v Suttie (1840) 2 D 514; Callendar v Milligan (1849) 11 D 1174; Adamson v Glasgow...

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