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
- Whether the directors could be held liable in deceit for the false statement in the prospectus regarding the right to use steam power.
- What constitutes fraudulent misrepresentation for the purposes of establishing liability in the tort of deceit.
- 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.