The “Fraud Vitiates Everything” Principle
Our Associate Habiba Mokhtar delves into the principle of “fraud vitiates everything,” analyzing its impact on legal transactions, judicial practices and its application in Bahrain and the MENA region.
Habiba Mokhtar ([email protected]) – Associate
Bahraini law, like most legal systems in the MENA region, does not explicitly codify the general illegality of fraud nor define its impact on legal transactions in a centralized manner. Instead, its illegality is addressed on a case-by-case basis throughout the Civil Code. Since fraud can manifest in various forms across legal dealings, the Bahraini judiciary, along with most regional judiciaries, relies on the uncodified principle “fraud vitiates everything”. This judicial principle effectively voids contracts or transactions tainted with fraud and serves as a judicial safeguard to address matters not directly regulated by specific legislative provisions, ensuring that perpetrators cannot benefit from their wrongdoing. This article seeks to outline the key elements of fraud, explain how fraud can be established, and explore the application of the principle in practice.
Elements of Fraud
Following the definition provided by Dr. Mahmood Gamal Eldin Zaki, “The issues of Civil Liability: in agreements concerning liability” Vol. 2, (1990 ed.), pp. (87-90), and the approach observed to be adopted by the Bahraini and Egyptian Court of Cassation, as highlighted in Practical Implementation below, fraud can be defined as any act or omission that (i) evades a contractual or legal obligation, and (ii) is committed with the intent to cause harm. This definition encapsulates both deceptive actions and omissions designed to deceive or defraud another party, undermining the integrity of the transaction.
Establishing Fraud
There is a rebuttable presumption adopted by the courts, that a person is presumed to be acting in good faith, unless proven otherwise. Hence, the burden of proof lies with the party alleging fraud to demonstrate that the transaction is tainted by fraudulent conduct in order to seek its avoidance.
The judiciary regards fraud as vitiating to all matters and, as such, allows for flexibility in proving fraud, permitting all forms of evidence, and leaving the final determination to the discretion of the court. This was affirmed by the Bahraini Court of Cassation in Challenge No. 188 J.Y. 1999 wherein the court stipulated that “Whether the document was obtained through fraudulent means may be established by all means of proof”.
Practical Implementation of the Principle
Pursuant to Article 1 of Decree Law No. 19/2001 Issuing the Civil Code, (the Civil Code), in the absence of a specific legal provision, the judiciary may draw on various sources, including custom, Islamic Sharia, and natural law, to form the basis of its decision.
Accordingly, while the principle may sometimes be used to assert the application of a legislative provision, resorting to the principle as the basis for the voidance of a transaction is only applicable when no specific legislative provision governs the issue.
Application In Contractual Relationships
In Challenge No. 132 J.Y. 2023, the Bahraini Court of Cassation dismissed a broker’s claim for commission, ruling that the property sale was invalid due to fraud. The brokerage contract entitled the broker to a commission even if the sale was conducted through earnest money [a deposit made by a buyer to demonstrate their intent to proceed with a transaction], regardless of whether the sale was finalized. The court found that the broker had orchestrated a fraudulent transaction to obtain the commission, by securing a buyer who paid only BHD 4,000 for a property valued at BHD 1.5 million, with no real intention to complete the purchase. Consequently, the sale was deemed invalid, and the brokerage contract was voided.
In the above judgment, the Bahraini Court of Cassation upheld the fraud vitiates everything principle by stipulating that “The judiciary has established a long-standing principle—not explicitly stipulated in law—that fraud vitiates everything, even when the dealings between the parties appear lawful on their face. It is a peremptory principle that governs all actions. The perpetrator of fraud must not benefit from his actions, as this would encourage corruption and undermine good faith in dealings. This principle aims to preserve the integrity of the courts and encourage honorable transactions.”
Application In Litigation Proceedings
In Challenge No. 5229 J.Y. 80, the Egyptian Court of Cassation found that a litigant had been deprived of their right to a fair trial due to collusion between the process server and the opposing party, resulting in fraudulent service of the appeal notice to an incorrect address. This fraudulent act invalidated the judgment, highlighting how fraud can impact the very integrity of legal proceedings.
In the above judgment, the Egyptian Court of Cassation upheld the principle in the context of litigation proceedings by stipulating that “The principle of “fraud vitiates everything” is a sound legal principle, even in the absence of a specific provision in the law. It is based on ethical and social considerations aimed at combating fraud, deceit, and dishonesty, and ensuring adherence to good faith in all transactions and procedures, thereby protecting the interests of individuals and society. Therefore, a judgment is void if it is proven to have been issued based on fraudulent procedures intended to deprive the rightful party of their interests, despite their compliance with legal requirements.”
Concluding Remarks
The “fraud vitiates everything” principle plays a crucial role in upholding justice and fairness in legal transactions and proceedings. It offers a vital lifeline for victims of fraud by providing a method of recourse to void fraudulent transactions and actions. The principle emphasizes the need for good faith in all dealings and protects the integrity of the legal system by preventing perpetrators from benefitting from their wrongdoing.
For more information, please contact us on [email protected].