Derry v Peek [1889] UKHL 1 (01 July 1889)

Company directors issued a prospectus stating they had the right to use steam power, honestly believing consent was a formality. This proved false. The House of Lords held that for an action in deceit, fraudulent intent must be proven, not mere carelessness.

Facts

The directors of the Plymouth, Devonport and District Tramways Company issued a prospectus to attract public investment. The prospectus stated that under its special Act, the company had the right to use steam or mechanical power for its trams, which would be a significant advantage over competitors using horse-drawn trams. In reality, the Act stipulated that the use of steam power was subject to the consent of the Board of Trade. The directors honestly believed that obtaining this consent was a mere formality and that it would be granted as a matter of course. Relying on the prospectus, Mr Peek purchased shares in the company. The Board of Trade ultimately refused to grant consent for the use of steam power, and the company was wound up. Mr Peek brought an action for deceit against the directors (including the chairman, Mr Derry), claiming damages for fraudulent misrepresentation in the prospectus.

Issues

The central legal issue before the House of Lords was to define the necessary elements of fraudulent misrepresentation, also known as the tort of deceit. Specifically, the Court had to determine whether a false statement made without reasonable grounds for believing it to be true was sufficient to establish fraud, or whether proof of a dishonest intention (i.e., knowledge of the falsehood or recklessness as to its truth) was required.

Judgment

The House of Lords, reversing the decision of the Court of Appeal, found in favour of the directors. The leading judgment was delivered by Lord Herschell, who provided the classic definition of fraud in English law. He carefully distinguished between a lack of care and actual dishonesty.

The Test for Fraud

Lord Herschell established a clear, three-part test for establishing fraud in an action for deceit:

First, in order to sustain an action of deceit, there must be proof of fraud, and nothing short of that will suffice. Secondly, fraud is proved when it is shewn that a false representation has been made (1) knowingly, or (2) without belief in its truth, or (3) recklessly, careless whether it be true or false. … To prevent a false statement being fraudulent, there must, I think, always be an honest belief in its truth.

He emphasised that a statement made through sloppiness or negligence, without dishonesty, is not fraudulent. The crucial element is the state of mind of the person making the representation. While the absence of reasonable grounds for a belief might be evidence from which fraud could be inferred, it did not in itself constitute fraud. The court’s task was not to assess whether the directors *should* have held their belief, but whether they *did* honestly hold it.

Application to the Facts

Applying this test, Lord Herschell concluded that the directors were not liable. While their statement about having the right to use steam power was untrue and they may have lacked reasonable grounds for their optimistic belief, the evidence showed they honestly believed that securing the Board of Trade’s consent was a certainty. Their belief was not held dishonestly or recklessly.

I think the directors did honestly believe that what they asserted was true… They made a mistake, and in my opinion an unreasonable one… But it is an error into which honest men might fall without being chargeable with a fraudulent intention.

Therefore, as there was no proof of fraud, the action for deceit had to fail.

Implications

The decision in Derry v Peek definitively drew a sharp line between common law fraud and carelessness. It established that the tort of deceit requires a high standard of proof, demanding evidence of a ‘guilty mind’ or dishonesty. The judgment created a gap in the law where a person who suffered financial loss due to a carelessly made, but honest, false statement was left without a remedy in tort. This lacuna was a significant point of legal debate for decades and was eventually filled by the House of Lords’ development of the tort of negligent misstatement in Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] and by Parliament through the Misrepresentation Act 1967, which created a statutory remedy for non-fraudulent misrepresentation.

Verdict: The judgment of the Court of Appeal was reversed. The appeal by the directors was allowed, and they were found not liable for deceit.

Source: Derry v Peek [1889] UKHL 1 (01 July 1889)