• In the case ofDerry v Peek [1889] 14 App Cas 337, it was held actual fraud is proven when false representation has been made knowingly irrespective of whether it was correct or recklessly made.
  • This tort and company law case is related to misrepresentation and fraud.

Facts of the Case

  • Tramway carriages may be moved by animal power under s 34 Tramways Act 1870 or steam power under the Board of Trade.
  • A prospectus was released stating the Plymouth, Devonport and District Tramways Company would use steam power then the Board of Trade directors refused to permit its usage.
  • The statement made in question: “The company had the right to use steam or mecanical power instead of horses”.
  • Lower courts claimed if D makes a false statement without a reasonable cause even if they believed it to be true then the statement is dishonest and the law states it’s an act of fraud.
  • C claimed an action of deceit against D.

Issues

  • Is there false representation in the prospectus?
  • Is there legal fraud?

Held by House of Lords

  • Judgment reversed – D is not liable for deceit because of their honest belief.

Lord Bramwell

Actual fraud

  • D knew the statement was untrue and that the right was conditional not absolute but it cannot be fraud nor an unreasonable misstatement.
  • “I hold that actual fraud must be proved in this case to make the defendants liable, and, as I understand, there is never any occasion to use the phrase “legal fraud” except when actual fraud cannot be established”.
  • According to the prospectus, steam power could rightfully be used by the Plymouth, Devonport and District Tramways Company.
  • “I think, with all respect, that in all the judgments there is, I must say it, a confusion of unreasonableness of belief as evidence of dishonesty, and unreasonableness of belief as of itself a ground of action”.

Lord Fitzgerald

Whether the statement in the prospectus is untrue

  • The statement and the Tramways Act 1870 decreeing the Plymouth, Devenport and District Tramways company could use steam power was not untrue.
  • The paragraph of the prospectus containing the statement is morally true according to the lord.
  • “A director is bound in all particulars to be careful and circumspect, and not, either in his statements to the public or in the performance of the duties he has undertaken, to be careless or negligent, or rash. Want of care or circumspection, as well as recklessness, may in such a case as the present be taken into consideration in determining at every stage the question of bona fides”.

Lord Herschell

False representation

  • “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”.
  • Knowledge is only needed as mens rea when fraud is established as outlined by Maule J in Evans v Edmonds [1853] 13 C. B. 777. Motive and intent are not considered.
  • Honest belief however can dismiss claims of fraud even if the representation is careless.

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