The Fraud Exception

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A person who has relied on fraud in order to register himself as a proprietor will not enjoy indefeasibility.

This article is a topic within the subject Property, Equity and Trusts 2.

Contents

Required Reading

Edgeworth et all, Sackville and Neave's Property Law Cases and Materials, 8th edition, Lexis Nexis, 2008, pp. 512-525 [5.75-5.87].

Introduction

The laws of indefeasibility do not apply in an instance where the registered proprietor has relied on fraud. The legislation explicitly states that the operation of the indefeasibility provisions (eg, s 42 and s 43) is excepted in the cases of fraud.

A good illustration of the fraud exception is Loke Yew v Port Swettenham Rubber:

  • One type of fraud is where a party promises that an unregistered interest will be preserved (in order to induce another party to agree to a transaction) and then goes back on that promise.
  • In such a case, the fraudulently party will come within the fraud exception made in the legislation and thus would not enjoy indefeasibility.

Mere Notice is Not Fraud

The fact that a purchaser is aware that there are unregistered or equitable interests (which will become barred once when he completes registration) will not make him guilty of fraud.

  • This is given effect by 'the notice provision' (s 43).

Fraud Must Be Operative

[1] It is important to note that an exception will only be made for fraud if the fraud is 'operative' - in other words, if the fraud actually caused a person to act in a way that is detrimental to himself. If the fraud resulted in no harm, it won't affect indefeasibility.[2]

Carelessness or Failure to Make Inquiries

This section deals with a situation in which a party is alleged to be a sort of 'accomplice' to the fraud of another because it failed to check a document properly. Carelessness in examining a document for fraud, or the failure of a party to make inquiries (even if they were reasonable), will not make a registered proprietor guilty of fraud.

This was discussed in Assets Co Ltd v Mere Roihi:[3]

  • A person who fails to discover the fraud of another because he didn't make inquiries is not guilty of fraud.
    • The fraud must be 'brought home' to the party - ie, the party must be a part of the fraud in a way to come within the exception.
  • However, if the person had suspicions that there might be fraud, and then didn't make inquiries so as to not find out and thus tied down by law (this is called willful blindness - shutting one's eyes to avoid implications), then they are guilty of fraud.
  • A person who honestly believed that a transfer is legitimate and free from fraud is not guilty of fraud.

Note that this means that the concept of 'constructive knowledge' (knowledge which should and could have been discovered by making normal inquiries) does not apply to fraud. Actual knowledge is necessary.

This ruling was affirmed in Pyramid Building Soceity (in liq) v Scorpion Hotels Pty Ltd,[4], which also went further and stated that:

  • What would be characterised as 'negligence' (eg, failure to make inquiries) will not be extended to mean 'willful blindness'. Willful blindness requires more than mere negligence or the failure to make inquiries.

Fraud and Agency

[5] A party can sometimes be guilty of fraud because its agent was acting fraudulently.[6]

This was explained in Schultz v Corwill Properties Pty Ltd:[7]

  • There are two possible agency situations:
    1. The agent himself has acted fraudulently.
      • If the agent was 'acting within the scope of his actual or apparent authority' (given to him by the principal) then the principal will be guilty of fraud.
    2. The agent has learned of the existence of fraud by another.
      • If the agent has actual (as opposed to constructive) knowledge of fraud, then the agent will be presumed to have communicated to the principal all information that he gained 'in the course of carrying out the transaction' (the big requirement is of actual knowledge).

False Attestations

[8] Another common example of fraud and agency is when an agent (such as a bank officer) falsely attests a signature (confirms it to be valid when it is not). That rule is that if an agent honestly believed that the impersonator was the right person/the signature was not forged, he will not be guilty of fraud.

This was discussed in Russo v Bendigo Bank Ltd:

  • Fraud, in the context of the legislation, requires more than saying something is false - it requires some actual disonesty or 'moral turpitude'.
  • It sometimes (but not always) involves gaining something from the fraud etc.


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End

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References

Textbook refers to Edgeworth et all, Sackville and Neave's Property Law Cases and Materials, 8th edition, Lexis Nexis, 2008.

  1. Textbook, p. 516 [5.80].
  2. Bank of South Australia Ltd v Ferguson (1998) 151 ALR 729.
  3. [1905] AC 176, 210.
  4. [1998] 1 VR 188.
  5. Textbook, pp. 518-20 [5.82].
  6. Assets Co Ltd v Mere Roihi [1905] AC 176, 210.
  7. [1969] 2 NSWR 576.
  8. Textbook, pp. 519-520 [5.82].
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