Edgington v Fitzmaurice 07 Mar 1885 29 ChD 459, CA

Company directors issued a prospectus seeking investment, falsely stating the funds were for business expansion when they intended to pay off debts. An investor, who was partly induced by this lie, successfully sued for fraudulent misrepresentation. This established that a dishonest statement of future intention is a misrepresentation of fact.

Facts

The directors of a company issued a prospectus inviting subscriptions for debenture bonds. The prospectus stated that the objects of the issue were to enable the company to complete alterations to its buildings, to purchase horses and vans, and to further develop the trade of the company. However, the real purpose for raising the money was to pay off pressing existing liabilities. The plaintiff, Mr Edgington, advanced money on the debentures. He was induced to do so partly by the statements in the prospectus and partly by his own mistaken belief that the debenture would give him a charge on the company’s property. When the company became insolvent, he sued the directors for deceit.

Issues

The case presented two principal legal issues for the Court of Appeal:

1. Can a statement of future intention be considered a statement of existing fact, capable of founding a claim for fraudulent misrepresentation?
2. If a claimant is induced to enter a contract by both a fraudulent misrepresentation and their own separate mistake, can they still seek relief for the misrepresentation?

Judgment

The Court of Appeal, comprising Cotton, Bowen, and Fry L.JJ., unanimously upheld the trial judge’s decision in favour of the plaintiff. The Court found the directors liable for fraudulent misrepresentation.

Misstatement of Intention as Fact

The Court held that the statement in the prospectus regarding the intended use of the funds was a misrepresentation of fact. The directors had misrepresented the state of their minds. Lord Justice Bowen delivered the most cited passage on this point:

There must be a misstatement of an existing fact: but the state of a man’s mind is as much a fact as the state of his digestion. It is true that it is very difficult to prove what the state of a man’s mind at a particular time is, but if it can be ascertained it is as much a fact as anything else. A misrepresentation as to the state of a man’s mind is, therefore, a misstatement of fact.

Since the directors never intended to use the money for the stated purposes, their assertion was a fraudulent misstatement of fact.

Inducement

The Court also addressed the issue of causation. The defendants argued that because the plaintiff admitted to also being influenced by his own mistake about the debentures being a charge on the property, the misrepresentation could not be said to have caused his loss. The Court rejected this argument. Lord Justice Cotton explained the correct legal test:

It is not necessary to shew that the misstatement was the sole cause of his acting as he did. If he acted on that misstatement, though he was also influenced by an erroneous belief, the Defendants will be still liable.

Lord Justice Bowen concurred, stating that the representation must be one that was ‘actively present to his mind when he did so act’. So long as the misrepresentation was a material part of the reason the plaintiff entered the contract, it was a sufficient inducement, even if other factors were also at play.

Implications

The decision in Edgington v Fitzmaurice is a landmark authority in the English law of contract, particularly concerning misrepresentation. Its importance lies in two key principles it established:

1. Statement of intention as a fact: It clarified that a person’s present intention is a matter of existing fact. Therefore, a dishonest statement about what one intends to do in the future is an actionable misrepresentation of that fact, not merely a broken promise. This prevents parties from making false claims about their intentions to induce others into contracts with impunity.
2. The ‘but for’ test of inducement: The case establishes that a misrepresentation does not need to be the sole or principal reason for a party to enter a contract. It is sufficient if the misrepresentation was a material factor that played a ‘real and substantial’ part in inducing the decision. This broadens the scope for claimants to seek rescission or damages for misrepresentation where multiple factors influenced their decision.

Verdict: The appeal was dismissed with costs; the original judgment in favour of the plaintiff, Edgington, was affirmed.

Source: Edgington v Fitzmaurice 07 Mar 1885 29 ChD 459, CA