## Facts

- A tramway company issued a prospectus stating it had the right to operate trams powered by steam.
- The directors made this statement to attract investors, aiming to raise capital through share sales.
- At the time, the company had not obtained the required approval from the Board of Trade to use steam power.
- The directors believed the approval was a mere formality, but formal consent was ultimately refused by the Board.
- As a result, the company could not run its trams as intended and was wound up.
- Shareholders who had bought shares on the basis of the prospectus sought damages against the directors, arguing they had been induced by a false representation.

## Issues

1. Whether the directors could be held liable in deceit for the false statement in the prospectus regarding the right to use steam power.
2. What constitutes fraudulent misrepresentation for the purposes of establishing liability in the tort of deceit.
3. Whether honest belief, even if careless or unreasonable, negates liability for fraudulent misrepresentation.

## Decision

- The House of Lords found in favour of the defendant directors and held them not liable for deceit.
- The Court determined that while the statement in the prospectus was false, there was no evidence of dishonesty or fraudulent intent by the directors.
- It was held that fraudulent misrepresentation is limited to statements made knowingly false, without belief in their truth, or recklessly without caring whether they are true or false.
- The decision clarified that mere carelessness or lack of reasonable grounds for belief does not equate to fraud.
- The directors’ honest belief in the truth of the statement, even if unfounded, was sufficient to absolve them of liability.

## Legal Principles

- The tort of deceit requires a false representation made knowingly, without belief in its truth, or recklessly as to its truth.
- Honest belief, regardless of whether it is careless or unreasonable, prevents a finding of fraudulent misrepresentation.
- Mere negligence or innocent mistake does not establish liability for deceit.
- The motive behind the misrepresentation is irrelevant if dishonesty or recklessness cannot be shown.
- Derry v Peek set a precedent distinguishing fraudulent from negligent and innocent misrepresentation, requiring proof of the defendant’s state of mind.

## Conclusion

Derry v Peek clarified that liability for deceit arises only when a false statement is made knowingly, without belief in its truth, or recklessly, establishing a strict standard for fraudulent misrepresentation that remains central in tort law.


Derry v Peek (1889) 14 App Cas 337