Derry v. Peek
By Simran Sabharwal
Case Citation: 14 App.Cas. 337
Jurisdiction: House of Lords
Date of decision: 1 July 1889
Bench: Lord Halsbury L.C., Lord Watson, Lord Bramwell, Lord Fitzgerald, Lord Herschell.
Derry v. Peek is considered as one of the most important judgments in English Tort Law and English Contract Law. This case further became the basis for establishing the three-part test for fraudulent misrepresentation. In the following case, the House of the Lords stated that when a company issues a prospectus to issue shares, they have no general duty. They can do it without any proper guidelines which means they have no authority to use skill and care to avoid making misstatements. Also, the case has been qualified to become statute and got codified. It can be seen in the Companies Act, 2006. The Act now confirms that full disclosure should be made in the securities market. This is also done to avoid a financial crisis and bring transparency. This case can be considered a landmark judgment as it is a test for fraudulent cases. If the defendant knows the statement is false or is reckless as to its truth or does not believe the statement then it can be called fraudulent misrepresentation and the judgment is given on the lines of Derry v. Peek.
FACTS OF THE CASE –
Henry William Peek is the plaintiff in the following case. He received a prospectus of a company which deals with trains. The prospectus stated that due to a new law the company would switch the usage from horse-powered engines to mechanical or steam. Also, the prospectus stated that this will lead to great savings and eventually increase profitability which will benefit the investors. After a thorough reading of the prospectus, Peek decided to buy the shares of the company. The point which must be noted is that the company had no permission to use that as the rights were reserved with the Board of Trade. The company was not aware of this and applied for it honestly believing that they will obtain the permission and believed that it was just a formality. Apart from Henry William Peek, the plaintiff, there were many shareholders who bought the shares on the sole statement issued by the company. Later, the company could not obtain the permission and the company ended up in liquidation. As a result, Peek sued the directors for misrepresentation or deceit.
Whether any action of the company amounts to misrepresentation?
"Misrepresentation is demonstrated when it is demonstrated that a false portrayal has been made intentionally, or without faith in its reality, or rashly without minding whether it is valid or false." A false proclamation made without sensible reason for trusting it to be genuine might be proof of extortion considering offended party's dispute that respondent had no real confidence in its fact, however, such an assumption is rebuttable. Such an announcement, whenever made in the genuine conviction that it is valid, isn't fake and no activity for misdirection will lie. 'Extortion without harm' and 'harm without misrepresentation' doesn't offer ascent to an activity for duplicity which lies just when both misrepresentation and harm meet, for example at the point when offended party depending upon the false articulation follows up on it to his inconvenience.
Misrepresentation is additionally when a gathering makes a representation which is false, mistaken, wrong and so forth distortion is guiltless, for example not purposeful. The gathering putting forth the expression trusts it to be valid.
To prove one guilty under misrepresentation or fraud following ingredients need to be fulfilled:
Initially, in order to withstand an act of dishonesty, there must be proof of fraud, and nothing short of that will suffice. Then if, fraud is proved when it is shown that a false representation has been made
(1) Knowingly, or
(2) Without belief in its truth, or
(3) Recklessly, careless whether it is true or false.
To prevent a false statement being fraudulent, there must, I think, always be an honest belief in its truth. And this probably covers the whole ground, for one who knowingly alleges that which is false, has obviously no such honest belief. If fraud is proved, the motive of the person guilty of it is immaterial and become immaterial to fix the liability of accused. It matters not that there was no intention or move to cheat or injure the person to whom the statement was made.
In my opinion, making a false statement through want of care falls far short of, and is a very different thing from, fraud, and the same may be said of a false representation honestly believed though on insufficient grounds and which does not amount to misrepresentation.
The alleged statement was untrue in the sense that it was stated as an absolute right which was in fact conditional. The directors honestly believed that it was the mere question of formality to obtain board of trade approval and the Co. has complied with the procedures and requirements, the approval was due. Hence, they had an honest belief in the truth of the impugned statement and it never dwelled in their minds that the board of trade will refuse such consent. An action of deceit will only stand in a court when a plaintiff can show not only misrepresentation, but also that defendants knew or have an evil motive to deceive, they would be unable to follow through with their representations.
Considering these observations, the honest belief was reasonable, and defendants could not be held liable for misrepresentation as it does not fulfil the requirements to prove one guilty of misrepresentation, directors of the company do not have any malice or wrongful intention to deceive. The court found this to be an action of deceit, under which the establishment of misrepresentation alone is not enough to prove liability. In this case, Plaintiff relied on the prospectus, which may have been misrepresentation, but Defendants reasonably believed they could glean approval of the board of trade and should not be held liable for their later failure to do so.
Hence, Company is not liable for the offence of misrepresentation and fraud when they issue prospectus without final acceptance of board of trade as to sustain an action for fraudulent misrepresentation, fraud must be proved. Fraud will be proved when it is shown that the false representation is made knowingly; or without belief in its truth; or recklessly, careless whether it be true or false.