Derry v Peek

Facts

The Plymouth, Devonport and District Tramways Company was authorised by a special Act of Parliament to run tramways by animal power and, with the consent of the Board of Trade, by steam power. The directors, including Derry, issued a prospectus stating that the company had the right to use steam or mechanical power instead of horses. They honestly believed that the Board of Trade's consent was a formality that would be granted. The Board later refused consent for most of the lines, and the company was wound up. Peek, who had taken shares in reliance on the prospectus, sued the directors for deceit.

History

Stirling J found for the directors. The Court of Appeal reversed his decision and held the directors liable in deceit, and the directors appealed to the House of Lords.

Issue

Whether a person who makes a false statement which he honestly believes to be true, but without reasonable grounds for that belief, is liable in the tort of deceit.

Held

Appeal allowed. The directors were not liable in deceit, because they honestly believed their statement to be true.

Ratio

• Fraud is proved when it is shown that a false representation was made knowingly, or without belief in its truth, or recklessly, careless whether it be true or false.
• A false statement made carelessly, and without reasonable grounds for believing it true, is not for that reason fraudulent, although the absence of reasonable grounds may be evidence that the belief was not honestly held; an honest belief, even if unreasonable, defeats a claim in deceit.

The judgments

Key reasoning

• The action of deceit rests on a morally culpable state of mind, so that to equate negligence in forming a belief with fraud would confuse the law of deceit with the law of negligence.
• The Chancery cases allowing rescission of a contract for an innocent misrepresentation did not support the imposition of liability in damages in deceit, since they concerned a different remedy with different requirements.
• The directors held an honest belief that the consent was a mere formality, so even though they were negligent in making the statement they were not dishonest and were not liable in deceit.

Where it fits in the module

On the FHS Tort list under deceit. Derry v Peek is the core authority on the state of mind required, and the debates concern the meaning of recklessness, the role of honest belief and its reasonableness, and the relation of deceit to negligent misstatement and statutory liability. It can be read with Smith New Court Securities Ltd v Scrimgeour Vickers (Asset Management) Ltd [1997] AC 254 and Standard Chartered Bank v Pakistan National Shipping Corp (Nos 2 and 4) [2002] UKHL 43 on damages and contributory negligence in deceit, and with Hedley Byrne on how the law of misstatement developed to cover careless statements.

Criticisms

• Requiring subjective dishonesty protects the honest but careless maker of a statement, even though those who induce reliance by a prospectus are best placed to verify it, which is why Parliament intervened to impose liability on directors for misleading prospectuses.
• Recklessness is defined by reference to an absence of care whether the statement is true, a state of mind that is difficult to prove, and courts in practice infer it from the lack of reasonable grounds, which blurs the distinction on which the decision rests.
• Because deceit imposes liability for all direct losses and, as held in Standard Chartered Bank v Pakistan National Shipping Corp, admits no reduction for the claimant's contributory negligence, the narrowness of the tort makes the boundary of dishonesty very significant, yet the case offers little guidance on how an objective standard should enter.