Derry v. Peek
(1889) LR 14 App Cas 337
(Misrepresentation or Fraud—Collateral Warranty)
A tramway company’s prospectus stated that it had the right to use steam power for moving carriages as an absolute right, though in actuality it was subject to condition of Board of Trade (BoT). Plaintiff, on faith of that statement, took shares of the Co. When Board of Trade refused its consent, and Co. got wound up, plaintiff brought an action for deceit against the Co. directors.
ISSUE: Whether any action for fraud can succeed against the defendants?
“Fraud is proved when it is shown that a false representation has been made knowingly, or without belief in its truth, or recklessly without caring whether it is true or false.” A false statement made without reasonable grounds for believing it to be true, may be evidence of fraud in light of plaintiff’s contention that defendant had no actual belief in its truth; but such a presumption is rebuttable. Such a statement, if made in the honest belief that it is true, is not fraudulent and no action for deceit will lie. ‘Fraud without damage’ and ‘damage without fraud’ doesn’t give rise to an action for deceit which lies only when both fraud and damage converge, i.e. when plaintiff relying upon the fraudulent statement acts upon it to his detriment.
The alleged statement was untrue in the sense that it was stated as an absolute right which was in fact conditional on the approval of BoT. The directors honestly believed that it was the mere question of formality to obtain BoT approval and the Co. having complied with the procedures and requirements, the approval was due. Hence, they had honest belief in the truth of the impugned statement and it never dwelled in their minds that BoT will refuse such consent. In light of these observations, the honest belief was reasonable and defendants could not be held liable for deceit.
Author: Vishrut Kansal (National University of Juridical Sciences, Kolkata)