Derry v. Peek
Fraud requires a false statement made knowingly, without belief in its truth, or recklessly careless whether true or false; an honestly believed false statement is not fraud.
Facts
Company directors issued a prospectus stating the company was entitled to use steam power to run its trams, believing in good faith that the requisite consent of the Board of Trade would follow as a matter of course. The consent was in fact refused for parts of the line and the company was wound up. Shareholders who had subscribed on the faith of the prospectus sued the directors in the tort of deceit.
Issues
- What must be proved to sustain an action of deceit (fraud).
- Whether a false statement honestly believed to be true can amount to fraud.
Arguments
The shareholders argued that the directors had made an untrue statement that induced their investment and should be liable in deceit. The directors argued that they honestly believed the statement to be true, and that honest belief negatives the dishonesty essential to fraud.
Held
The House of Lords held there was no fraud because the directors honestly believed their statement to be true. Lord Herschell summarised the law: to sustain deceit there must be proof of fraud and nothing short of it; fraud is proved when a false representation is made (1) knowingly, (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 always be an honest belief in its truth, and once fraud is proved the motive of the person guilty of it is immaterial. As the directors held an honest belief, the deceit claim failed.
Ratio decidendi
Fraudulent misrepresentation requires the absence of honest belief in the truth of the statement (made knowingly false, without belief, or recklessly); honest belief, however careless, excludes fraud.
Significance
The classic common-law definition of fraud that informs the meaning of 'fraud' under Section 17 of the Indian Contract Act, particularly the requirement in Section 17(1) of a suggestion 'by one who does not believe it to be true'. It draws the central line between fraud and innocent misrepresentation and is foundational to the law of deceit.
Related
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