Derry v. Peek

Directors of a tramway company told the public in a prospectus that the company had the right to use steam power. The right was in fact subject to the Board of Trade's consent, which the Board later refused except on certain portions. The House of Lords held that the directors honestly believed their statement, so an action of deceit failed. The judgment has no numbered paragraphs, so this page cites each judge's opinion.

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Parties

William Derry — appellant; one of the five directors of the Plymouth, Devonport and District Tramways Company. He was sued for deceit.

J. C. Wakefield — appellant; a director of the company. He was sued for deceit.

M. M. Moore — appellant; a director of the company. He was sued for deceit.

J. Pethick — appellant; a director of the company. He was sued for deceit.

S. J. Wilde — appellant; a director of the company and a member of the Bar. Lord Herschell noted that his conduct in promoting the company was free from suspicion.

Sir Henry William Peek, Baronet — respondent; the plaintiff. He took shares in the company on the strength of the prospectus.

Plymouth, Devonport and District Tramways Company — not a party; the company was incorporated by a special Act and later wound up. Its name was struck out of the writ.

Procedural History

1. Writ. The writ was issued in February 1885. It first claimed rescission of the contract with the company (Lord FitzGerald).
2. Amendment. The writ was amended to strike out the company as defendant and the prayer for rescission. It became an action for deceit against five directors, claiming damages for the fraudulent misrepresentations of the defendants (Lord FitzGerald).
3. Trial before Stirling J. The plaintiff and the defendants were called as witnesses. Stirling J. dismissed the action (37 Ch. D. 541). He saw and heard the witnesses and accepted that they were witnesses of truth (Lord Herschell). Lord Halsbury said Stirling J. acquitted them of intentional deceit.
4. Court of Appeal. Cotton L.J., Sir J. Hannen and Lopes L.J. reversed that decision. They held the defendants liable to make good the plaintiff's loss on taking the shares and ordered an inquiry.
5. Appeal to the House of Lords. The defendants appealed. Arguments were heard on 28 and 29 March and 5, 9 and 11 April 1889. The House took time for consideration, and judgment was given on 1 July 1889.

Facts

The report gives this summary. It says the facts are set out at length in the report of the decisions below.

1. A special Act (45 & 46 Vict. c. clix.), passed on 24 July 1882, authorised the Plymouth, Devonport and District Tramways Company to make seven tramways in accordance with plans and sections.
2. Section 35 of the special Act allowed the carriages to be moved by animal power. It also allowed steam or other mechanical power, with the consent of the Board of Trade, for fixed periods and subject to the Board's regulations.
3. The use of steam was subject to the regulations in Schedule A, which had ten regulations, and to any regulations the Board of Trade added or substituted. Section 37 let the Board make bye-laws. Section 44 required two months' notice where the company intended to use steam.
4. The Tramways Act 1870 (33 & 34 Vict. c. 78), section 34, was incorporated in the special Act. It provided that all carriages on a tramway are moved by the power the special Act prescribes, and by animal power only where none is prescribed.
5. Under the special Act the tramway could not be opened for traffic until inspected and certified fit by the Board of Trade.
6. In February 1883 the appellants, as directors, issued a prospectus. It said the company had the right, by the special Act, to use steam or mechanical motive power instead of horses. It also said a considerable saving in working expenses was fully expected.
7. Soon after the prospectus, the respondent applied for and obtained shares. He alleged that he relied on that paragraph and believed the company had an absolute right to use steam.
8. The company made tramways, but the Board of Trade refused to consent to steam or mechanical power except on certain portions.
9. The company was wound up. In 1885 the respondent sued the appellants for deceit and claimed damages for fraudulent misrepresentations that induced him to take shares.
10. The statement of claim alleged that the defendants intended to represent that the company had an absolute right to use steam and other mechanical power, and made this fraudulently to induce the plaintiff to take shares (Lord FitzGerald).
11. Four of the defendants were brought in to act as directors in circumstances that raised suspicion. They most improperly received sums of money from the promoters (Lord FitzGerald; Lord Herschell). Lord Bramwell also criticised directors who accepted their qualification from the contractor or intended contractor.
12. The report of 6 November 1884 showed that the Board of Trade's consent was necessary and that the Devonport corporation would not consent (Lord Bramwell). The plaintiff still had every confidence in the directors (Lord Bramwell).
13. General Hutchinson's report of 12 July 1884 to the Board of Trade used similar words. It said the Act of 1882 gave the company authority to use mechanical power over all its system (Lord FitzGerald; Lord Herschell).
14. The prospectus was framed after a division of opinion among the directors on steam. Before it was issued, the directors resolved in favour of steam (Lord FitzGerald).
15. The plaintiff's evidence about what induced him to take shares was hard to reconcile with his having been substantially induced by the statement (Lord Halsbury). Lord Bramwell did not believe the plaintiff was influenced by the misstatement, though he thought the plaintiff an honest witness.

Issues Raised

1. Must the plaintiff prove actual fraud to succeed in an action of deceit against directors for a false statement in a prospectus?
2. Is fraud proved where the defendant honestly believed the statement to be true, but had no reasonable ground for that belief?
3. Was the statement that the company had the right to use steam power untrue in fact, or only in a technical sense?
4. Did the defendants knowingly make a false statement, or make one they did not believe to be true, or one about which they were careless whether it was true or false?
5. Was the plaintiff induced to take shares by the statement?

Arguments Contended

For the appellants (the directors)

Counsel were Sir Horace Davey Q.C., Moulton Q.C. and M. Muir Mackenzie.

• The Court of Appeal's rule goes much further than any earlier decision and is unsound.
• An action of deceit always needed proof of fraud, at common law and in Chancery. Fraud has never been exhaustively defined.
• Fraud must be something an honest man would not do, not merely something a logical or clear-headed man would not do. No honest mistake is fraud.
• Once it is shown that a man honestly intended to do his duty, the consequences cannot turn his words into fraud. An obligation to see that no untrue statement is made is not broken fraudulently if there is no dishonest intention.
• A material misstatement may ground rescission. But the consequences of fraud and breach of contract differ widely. In fraud, the defendant bears all the consequences of the deceit, which may be very extensive.
• The essence of fraud is tricking a person into the bargain. If the directors suppressed the need for Board of Trade consent to make the bait more alluring, that would be fraud. That is a question of fact.
• It is not carelessness leading to an untrue statement that makes fraud. It is carelessness whether the statement is untrue or not. The authorities that speak of recklessly mean this.
• Taylor v. Ashton and Jolliffe v. Baker show the earlier law. The headnote of Taylor v. Ashton does not truly represent the decision. Polhill v. Walter, which the respondent may rely on, involved a defendant who knew the statement was untrue.
• The idea that something less than fraud would do first crept in with Lord Chelmsford's remarks in Western Bank of Scotland v. Addie. Cotton L.J. extended it in Weir v. Bell by treating recklessly as if it meant negligently. Recklessly means indifferent whether the statement be true or false.
• The confusion arose mainly after the Judicature Act, when Chancery judges sitting without juries tried actions of deceit and confounded issues of fact with issues of law.
• If the Court of Appeal is right, a negligent, improvident or wrong-headed man is a fraudulent man. Want of reasonable ground may be evidence of fraud, but it is not the same thing.
• On the facts, Stirling J. found the defendants believed the misstatement to be true, and that finding should be conclusive. The Court of Appeal did not contradict it.
• The statement really meant the company had obtained the statutory authority needed, because under the Tramways Act 1870 steam power is prohibited unless the special Act authorises it. The defendants may have thought it not worth encumbering the prospectus with the qualifications, or the qualifications may not have been present to their minds.
• The prospectus referred to the special Act, so anyone who consulted the Act could see the authority for himself.
• The plaintiff was in some degree influenced by the misstatement. But there was no evidence that he would not have taken the shares had the full truth about the consents been stated.

For the respondent (Sir Henry Peek)

Counsel were Bompas Q.C. and Byrne Q.C., with Patullo.

• The Court of Appeal's decision is right, for the reasons it gave.
• Directors are liable not only for a statement they know to be false but for one they ought to have known to be false. Counsel relied on Lord Westbury's obiter dictum in New Brunswick &c. Co. v. Conybeare, the obiter dicta of the Lords in Peek v. Gurney, and Jessel M.R.'s judgment in Smith v. Chadwick.
• It is not necessary that there be carelessness whether the statement is true or not. Carelessness or negligence in making the statement is enough. Making an untrue statement without reasonable ground is negligence that will support an action of deceit.
• Counsel relied on Slim v. Croucher, Evans v. Bicknell, Brownlie v. Campbell, Polhill v. Walter, Milne v. Marwood, Benton v. Great Northern Railway Company, Thorn v. Bigland, Smout v. Ilbery, Rawlins v. Wickham, Hallows v. Fernie, Mathias v. Fefts, Smith v. Chadwick, Pasley v. Freeman and Chandelor v. Lopus. Lord Halsbury referred to Haycraft v. Cressy.
• Counsel said it was unnecessary to go the full length of these propositions. Even if Lopes L.J.'s fourth proposition is not law, the appellants are liable. The evidence shows the statements were made knowing they were untrue, or with no belief on the subject.
• The prospectus said a considerable saving was fully expected. In fact the directors had not considered the matter. When they did so afterwards there was a majority of one only in favour of steam.
• The evidence differs as to each director. Derry never took the trouble to consider whether the statement was true or false. Wakefield and Wilde had complete knowledge but made statements they knew were not true, thinking the consents would be given.
• Pethick's evidence was inconsistent. At one moment he said the Board of Trade had no right to refuse consent if reasonable requirements were met. At another he said it had an absolute right to refuse.
• Moore stands in a different position. He can be held liable only under Lopes L.J.'s fourth proposition.
• The respondent is entitled to judgment on the grounds accepted by Lord Cranworth in Western Bank of Scotland v. Addie and by the Earl of Selborne in Smith v. Chadwick.
• The belief that would justify the appellants must rest on an exercise of judgment. Grounds sufficient in some cases would not be so where uberrima fides (utmost good faith) is required, for example in statements to an intending partner.
• On a director's duty to persons about to take shares, counsel cited New Brunswick and Canada Railway Company v. Muggeridge and Henderson v. Lacon (printed in the report as Senderson v. Lacon).

The House took time for consideration. Lord Halsbury L.C. said notice would be given if their Lordships wished to hear a reply.

Court's Reasoning

Five Law Lords gave opinions. All five agreed that the Court of Appeal's judgment should be reversed. The judgment has no paragraph numbers, so each step ends with the judge's name.

Lord Halsbury L.C.

1. Noted: he had recently expressed his opinion on actions of this kind in the Court of Appeal (Arnison v. Smith, 41 Ch. D. 348, 367) and adhered to it. He recalled the old saying that fraud without damage or damage without fraud gives no such action (Halsbury).
2. Noted: he had read Lord Herschell's judgment and wished to add nothing to its treatment of the authorities (Halsbury).
3. Held: the prospectus statement was untrue in fact, and well calculated to mislead persons likely to take shares. They would not know the technical division between tramways with and without power to use mechanical means. They would understand that the company was in an exceptionally advantageous position and had, at the time, the right to use steam (Halsbury).
4. Noted: such a statement, made deliberately with consciousness of its inaccuracy, would give rise to an action for deceit if damage followed from acting on it (Halsbury).
5. Held: the question is whether the statements were made with consciousness of their misleading character. He was influenced by the opinions of so many of their Lordships that the facts are consistent with the directors' innocence of any intention to deceive (Halsbury).
6. Noted: Stirling J. saw and heard the witnesses and acquitted the defendants of intentional deceit. The Court of Appeal reversed him on an untenable ground. That ground was that the directors were liable for having no reasonable ground for a belief which they were assumed to hold sincerely (Halsbury).
7. Noted: he would have liked a more exact account of how the prospectus was framed. He wanted the evidence of its draftsman and the discussions on the change of form that gave prominence to the steam power feature (Halsbury).
8. Held: the facts are reconcilable with the directors' innocence and with the absence of the mens rea (guilty mind) that he considered an essential condition of an action for deceit. The mere inaccuracy of the statement should not be pressed into creating a liability that does not exist in English law (Halsbury).
9. Noted: on inducement he had very considerable doubt. No one can analyse which fact in a prospectus induced him to subscribe. Yet Sir Henry Peek's own description of what induced him is hardly reconcilable with substantial inducement by this statement (Halsbury).
10. Held: he agreed that the judgment appealed from should be reversed (Halsbury).

Lord Watson

1. Held: he agreed with Stirling J. that, as a matter of fact, the appellants honestly believed the representation to be true (Watson).
2. Noted: it is by no means clear that the Court of Appeal judges meant to differ from that finding of fact. But they seemed to hold that an honest belief does not save the maker of a representation. He commits a fraud in law if the court or a jury thinks he had no reasonable grounds for his belief (Watson).
3. Held: he rejected that doctrine without hesitation. He found no warrant for it in English law (Watson).
4. Noted: he added nothing further, because he accepted without reserve the opinion of Lord Herschell (Watson).

Lord Bramwell

1. Held: the judgment should be reversed. He was glad, because it clears five men of good character of a charge of fraud that he thought wholly unfounded (Bramwell).
2. Noted: he hoped promoters would not think they can safely make inaccurate statements without responsibility. The public is at the mercy of company promoters, sometimes dishonest and sometimes over-sanguine, and needs all the law's protection (Bramwell).
3. Noted: he disapproved of directors accepting their qualification from the contractor or intended contractor. The contractor can only give it because he means to recover it in the price for the work. The directors fix that price and are paid to make it high, while their duty to shareholders is to make it low (Bramwell).
4. Noted: the public seeing these names may think the men respectable and confident in the scheme. It little knows they have made themselves safe against loss. He was glad Mr. Wilde, a member of his old profession, was not so paid. His one doubt was that safety from loss may have made the directors less careful about the truth of their statements (Bramwell).
5. Held: there is no need to trouble about legal fraud, because actual fraud must be proved here. He said the phrase is used only when actual fraud cannot be established. He called it a mischievous phrase that contributed to the erroneous decision below (Bramwell).
6. Noted: he was reluctant to cite authorities to show that actual fraud must be proved. It is one of the first things one learns. He thought it partly within the principle Qui s'excuse s'accuse (he who excuses himself accuses himself) (Bramwell).
7. Noted: a man who makes a contract is bound by it and must not bring it about by fraud. Warrantizando vendidit (he sold by warranting) gives a cause of action if the warranty is broken. Knowingly and fraudulently stating a material untruth that brings about the contract also gives one (Bramwell).
8. Noted: to this may now be added the equitable rule that a material misrepresentation, though not fraudulent, may give a right to avoid or rescind a contract where rescission is possible. That rule is not in question here (Bramwell).
9. Held: to found an action for damages there must be a contract and breach, or fraud. Every case from the earliest in Comyns' Digest to the present alleges fraud in deceit. No common law authority is to the contrary, though there are some incautious, hesitating expressions. The Master of the Rolls' contrary opinion came from a judge whose knowledge of actions of deceit was small, if any (Bramwell).
10. Noted: the plaintiff's case is that the defendants made an untrue statement, knew it to be untrue and knew it was likely to influence readers. Whether a prima facie case (a case good on its face) was made out need not be considered, since all the evidence is before the Court (Bramwell).
11. Held: the statement that the company has the right to use steam or mechanical power was untrue, because it was stated as an absolute right. In truth it was conditional on the Board of Trade's approval and the consent of two local boards. The defendants also knew the truth (Bramwell).
12. Held: it does not follow that the statement was fraudulent. There are various kinds of untruth. A man may know a fact, yet it may not be present to his mind, or it may not occur to him to mention it (Bramwell).
13. Noted: he gave the example of a man asked whether a writing is necessary for a contract for goods to be made. He might say Yes without adding that payment on receipt would suffice (Bramwell).
14. Noted: directors naturally trust their solicitors to prepare the prospectus. They find the statement without qualification and it does not occur to them to alter it. They swear they had no fraudulent intention, and their character was unimpeached (Bramwell).
15. Noted: the truth would have served their purpose as well. The plaintiff's own answer shows he would have been content with a statement that the power is subject to the usual Board of Trade approval and local consents, which were likely to be granted (Bramwell).
16. Noted: at the argument he said he was not sure he would not have passed the prospectus himself. He would not pass it now, knowing the use made of it. But he firmly believed it might have been, and was, honestly done by the defendants (Bramwell).
17. Noted: Stirling J. saw and heard the defendants and held that opinion. Lord Bramwell said it is difficult to say that the plaintiff was not. The report of 6 November 1884 showed that Board of Trade consent was necessary and that the Devonport corporation would not consent. Yet the plaintiff had every confidence in the directors (Bramwell).
18. Noted: Stirling J. refused to say whether actual fraud must be shown and decided whether the defendants had reasonable grounds. He held that they thought the company had the right stated. He held that their grounds were not so unreasonable as to justify a charge of fraud (Bramwell).
19. Noted: Stirling J. said mercantile men would cry out if the notion of deceit were extended to what is honestly done in the belief that things would come about. Lord Bramwell added that the objection may naturally not have occurred to the directors (Bramwell).
20. Noted: he agreed with Stirling J. that he need say no more on whether the plaintiff would have applied for shares had he known the contents of the Act, since this was not argued (Bramwell).
21. Noted: Cotton L.J. said a man is liable in deceit if he makes a statement known to be false, or made recklessly, or without care whether it is true or false, that is without any reasonable ground for believing it to be true. Lord Bramwell agreed with everything before the words that is. He read what follows as equivalent to what goes before (Bramwell).
22. Held: a man who makes a statement without care and regard for its truth or falsity commits a fraud. He is a rogue. Every man who makes a statement says he knows or believes it to be true (Bramwell).
23. Noted: Cotton L.J. then lost sight of his own definition. He spoke of a duty on a director to take care that statements are true and to have reasonable ground for them. He said the person receiving the statement has "a right to have true statements only made" (Bramwell).
24. Held: he agreed there is a duty on all persons to tell the truth. If they do not, they furnish evidence of fraud and may have the contract rescinded. He could not agree there is a right to have true statements only made, and he would much regret such a right (Bramwell).
25. Noted: if that were law, a statement reasonably believed true by its maker would give a cause of action if untrue, even though he had refused a warranty. He said: "There is a duty to tell the truth, or, rather, what is believed to be the truth." (Bramwell).
26. Held: he agreed that a man who makes a false statement without reasonable ground and without taking care to ascertain it is liable, if that means making a statement he knows or believes not to be true. The Court of Appeal held the directors liable not because they were dishonest but because they were unreasonable (Bramwell).
27. Noted: Cotton L.J. said he did not attribute any intention to commit fraud to the defendants. Lord Bramwell replied that the defendants were held liable not because they were dishonest but because they were unreasonable, and they never undertook to be otherwise (Bramwell).
28. Held: Sir James Hannen said it is enough if a man asserts as true what he does not know to be true and has no reasonable ground to believe. Lord Bramwell agreed only if the man knows he has no such ground and that knowledge is present to his mind. Otherwise he differed (Bramwell).
29. Noted: Sir James cited Lord Cairns for the view that persons who assert what they are ignorant of are as responsible as if they had asserted what they knew to be untrue. Lord Bramwell said this does not support Sir James's proposition. Sir James also did not deal with what he quoted from Lord Cranworth (Bramwell).
30. Noted: Sir James defined legal fraud as the degree of moral culpability in stating an untruth to which the law attaches responsibility. Lord Bramwell agreed that moral culpability brings responsibility. But believing without reasonable grounds is mental, not moral, culpability, if there is such a thing (Bramwell).
31. Held: the law applies fraud to all breaches of the moral duty to tell the truth, but that duty cannot be honestly broken. To be actionable, a breach must be dishonest. Sometimes a man must state what he believes to be the truth, however wrong it may be, as when he is asked about a servant's character (Bramwell).
32. Noted: he asked whether the directors had the matter present to their minds. Even if the question were whether they had reasonable grounds, he would decide in their favour (Bramwell).
33. Noted: he quite agreed with Lopes L.J.'s words: "I know of no fraud which will support an action of deceit to which some moral delinquency does not belong." That shows the meaning of Lopes L.J.'s fourthly, though what he said elsewhere makes it doubtful (Bramwell).
34. Held: all the Court of Appeal judgments confuse unreasonableness of belief as evidence of dishonesty with unreasonableness of belief as a ground of action in itself (Bramwell).
35. Held: it is most undesirable that actions should lie for statements made unreasonably but honestly. It would be disastrous if there were a right to have true statements only made (Bramwell).
36. Noted: Courts of Equity have in this kind of case disregarded a valuable general principle in their desire to do justice in a particular instance (Bramwell).
37. Noted: it might be well to enact that prospectuses of public companies carry a warranty of truth unless it is expressly said there is none. The objection is to exceptional legislation and to the danger of driving respectable, responsible men from being promoters and replacing them with those who are neither (Bramwell).
38. Held: unless fraud is shown, the action is not maintainable, and there was no fraud. Even if an unreasonable misstatement were enough, there was none. He did not believe the plaintiff was influenced by the misstatement, though he was an honest witness (Bramwell).

Lord FitzGerald

1. Noted: the writ was issued in February 1885 and first claimed rescission of the contract with the company. It was amended to strike out the company and the prayer for rescission, and it became an action for deceit against five directors (FitzGerald).
2. Noted: the statement of claim alleged that the misrepresentation was in the February 1883 prospectus. It alleged that the defendants meant to represent an absolute right to use steam and made the representation fraudulently to induce the plaintiff to take shares. The real issue was raised fairly and depends on matters of fact (FitzGerald).
3. Noted: circumstances in promoting the company and procuring four defendants as directors raised suspicion about their statements and their bona fides (good faith). The defendants were cross-examined at length and examined by the judge. The result apparently freed them from any imputation of moral misconduct (FitzGerald).
4. Noted: the first question, leaving fraud aside, is whether the statement was untrue. It was inaccurate as a statement of the special Act's legal effect. But was it untrue as a statement of the company's position in a popular and business sense? (FitzGerald).
5. Noted: he reviewed the statutes. The General Tramways Act (33 & 34 Vict. c. 78) puts tramways under the Board of Trade's supervision for public safety. Its section 34 says carriages are moved by the power the special Act prescribes (FitzGerald).
6. Noted: the special Act became law on 24 July 1882. Sections 4 and 5 empower the company to make seven tramways in accordance with the plans and sections. Section 15 provides for their formation, subject to the Board of Trade's orders. Section 16 bars opening for traffic until the Board inspects and certifies fitness (FitzGerald).
7. Noted: section 37 empowers the Board to make bye-laws for tramways where steam is used. Section 44 requires two months' notice where the company intends to use steam. Other sections provide for the use of steam if the company chooses it (FitzGerald).
8. Held: by section 35 Parliament conferred authority to use steam, which the Board of Trade could not do. It did not impose steam on the company, but said it may use steam if it elects to (FitzGerald).
9. Noted: the section's proviso makes the exercise of the steam powers subject to the regulations in Schedule A and to any regulations added or substituted by the Board of Trade. It is meant to give the public all reasonable protection against danger. Schedule A has ten regulations (FitzGerald).
10. Held: the Board of Trade's consent could not confer the right, and its absence would not take the right away. It is a precaution imposed by the legislature to defer the actual exercise of the right until the Board's supervision secures reasonable public protection (FitzGerald).
11. Held: with difficulty, he concluded that the statement that the company had the right to use steam power was not untrue in a popular or business sense. General Hutchinson used similar expressions in his report of 12 July 1884 (FitzGerald).
12. Held: the rest of the paragraph, that a considerable saving was fully expected, was not untrue. There had been a division of opinion among the directors, resolved in favour of steam before the prospectus was issued (FitzGerald).
13. Held: the paragraph, though inaccurate in law in one particular, seems on the whole to have been morally true. If that view is correct, it is an answer to the action (FitzGerald).
14. Noted: assuming that view is not adopted, he turned to the rest of the action. Cotton L.J. rightly called it a mere common law action. It is not altered by being brought in the Chancery Division or tried by a judge without a jury (FitzGerald).
15. Held: the common law action for deceit is founded on fraud, and moral fraud must be established. Since Collins v. Evans in the Exchequer Chamber it has never been doubted that fraud must concur with the false statement. It is not enough to show that a false representation was made (FitzGerald).
16. Held: the defendant must be shown to have known, when making it, that the representation was untrue. Or, in the words of the editors of the Leading Cases, he must be shown aware of the falsehood, fraudulently or to have made it fraudulently without belief that it was true (FitzGerald).
17. Noted: the respondent's leading counsel put the issue fairly. He said the defendants were not honest, stated a definite lie and knew it to be a lie. That is the very issue in the case (FitzGerald).
18. Noted: the whole law is found in the notes to Chandelor v. Lopus and Easley v. Freeman. There is also a clear summary of the decisions in the recent edition of Benjamin on Sales, by Pearson-Gee and Boyd (FitzGerald).
19. Noted: the report of Chandelor v. Lopus in Cro. Jac. 4 has little direct bearing without the opinion attributed to Anderson J. But a note in 1 Dyer (75a) gives the facts. Lopus sued Chandelor, a goldsmith skilled in precious stones, who asserted a stone to be a true bezoar stone (FitzGerald).
20. Noted: Popham C.J. held that if a man knowingly sells damaged goods as good, an action on the case lies for the deceit. But if he affirms them to be good without knowing otherwise, no action lies unless he warranted them. The action seems originally to have been on a warranty that failed in fact, as there had been no warranty. It was then sought to be supported as deceit, without an allegation that the defendant knew the representation was untrue (FitzGerald).
21. Noted: the note in 1 Dyer was probably by Mr. Treby, later Chief Justice Treby, who edited an edition published in 1688. Lord FitzGerald had not seen that edition. He quoted from Mr. Vaillant's edition of 1794 (FitzGerald).
22. Held: the conclusion of fact is that the defendants did not know the statement was untrue. They each in good faith believed it to be true. So it is unnecessary to consider the long, bewildering list of authorities or the Court of Appeal's reasons (FitzGerald).
23. Noted: one characteristic runs through the Court of Appeal judgments. The defendants' bona fide belief was unavailing unless it was reasonable and rested on reasonable grounds. On that view the jury would have to consider both the belief and the reasonableness of its grounds (FitzGerald).
24. Held: he was by no means satisfied that this is the law. If forced to give an opinion, he would follow Lord Cranworth in Western Bank of Scotland v. Addie (FitzGerald).
25. Noted: Lord Cranworth said that directors who bona fide believe their statements true cannot be guilty of fraud because others think there was no sufficient ground for the opinion. More care may be strong evidence that they did not really believe what they said. But that would follow from stating as true what they did not believe, not from lacking reasonable ground (FitzGerald).
26. Held: a director must be careful and circumspect in all particulars, and not careless, negligent or rash in statements to the public or in his duties. Want of care or circumspection, as well as recklessness, may be considered at every stage in deciding the question of bona fides (FitzGerald).
27. Held: the Court of Appeal's decision should be reversed (FitzGerald).

Lord Herschell

1. Noted: the statement of claim alleged that the appellants made untrue statements in a prospectus. It alleged they knew the facts were not as stated and made the representations fraudulently to induce the plaintiff to take shares (Herschell).
2. Held: this is a mere common law action of deceit, as Cotton L.J. described it. It differs essentially from an action to rescind a contract for misrepresentation of a material fact (Herschell).
3. Noted: for rescission it is only necessary to prove misrepresentation. However honestly it was made, the contract cannot stand. In deceit it is not enough to show misrepresentation alone. All agree something more must be proved, though the additional elements were controversial (Herschell).
4. Held: care is needed in applying observations from rescission actions, cited by the respondent's counsel, to deceit. The judges there were not deciding what supports an action of deceit (Herschell).
5. Noted: he put aside another class of cases. A person whose special province it was to know a fact gave an erroneous answer to an inquiry and was held bound to make good the assurance. Burrowes v. Lock is an example, where a trustee was asked by an intended lender whether he had notice of a prior charge on the fund (Herschell).
6. Noted: in such cases it has been said that an honest answer is no defence. Lord Selborne pointed out in Brownlie v. Campbell that these cases are in an altogether different category from actions for damages for false representation (Herschell).
7. Held: an action of deceit is a common law action decided on the same principles in Chancery or the common law divisions. There is no such thing as an equitable action for deceit. He cited Cotton L.J. in Arkwright v. Newbould, adopted by Lord Blackburn in Smith v. Chadwick (Herschell).
8. Noted: Cotton L.J. stated that a man is liable in deceit who makes a false statement, known to be false or made recklessly, or without care whether it is true or false, that is, without any reasonable ground for believing it to be true. The statement must be acted on to the plaintiff's prejudice (Herschell).
9. Held: he could not agree that recklessly or without care whether it is true or false and without any reasonable ground for believing it to be true are expressions that mean the same thing (Herschell).
10. Held: to state something careless whether it is true or false, and so without real belief in it, is essentially different from stating through want of care a falsehood that is honestly believed. A man may believe what he states though the Court thinks his grounds insufficient (Herschell).
11. Noted: the fact that authority says a reckless statement supports deceit does not show that want of reasonable ground does so too (Herschell).
12. Noted: Cotton L.J. said a director owes a duty to take care that a prospectus contains no false statement and that he has reasonable ground for it. He said a departure from that duty is enough, though not what he would call fraud (Herschell).
13. Held: the alleged right to have only true statements made is stated too widely, if meant as a legal right giving damages. It would make liable those who make untrue statements however innocently. It must have been meant to match the duty (Herschell).
14. Held: without proof of fraud no action of deceit is maintainable. He would show abundant authority for this (Herschell).
15. Noted: Sir James Hannen and Lopes L.J. stated the law in the same way. Lopes L.J.'s fourth proposition covers a statement untrue in fact, believed to be true, but without reasonable grounds (Herschell).
16. Held: all the Court of Appeal judges thought it enough to prove the statements were not in accordance with fact and that the maker had no reasonable ground for belief. They did not treat lack of reasonable ground as evidence of recklessness. They treated it as the test of liability. They thought they were following settled authority, so a close examination of the earlier authorities was needed (Herschell).
17. Noted: Pasley v. Freeman is the leading case. Grose J. dissented, holding such an action not maintainable against a person not party to a contract. Buller J. used the words of Croke J.: Fraud without damage, or damage without fraud, gives no cause of action, but where these two concur an action lies (Herschell).
18. Noted: Buller J. in reviewing Crosse v. Gardner said knowledge of the falsehood is fraud and deceit. He said of Risney v. Selby that the assertion alone will not maintain the action; the plaintiff must prove it was false and that the defendant knew it. Kenyon C.J. spoke of a fraudulent false affirmation about a third party's credit (Herschell).
19. Held: in Haycraft v. Creasy the defendant said he knew of his own knowledge that Miss R. could be credited to any amount. All the judges agreed fraud was of the essence. Lord Kenyon found fraud. The others held the words a strong expression of opinion honestly held. It is a distinct decision that knowledge of falsity is essential, and that belief in truth is a defence (Herschell).
20. Noted: in Foster v. Charles it was argued that a knowingly false representation was not actionable without intent to defraud. Tindal C.J. held it was fraud in law if a party makes representations he knows to be false and injury follows, though his motives may not be bad (Herschell).
21. Held: fraud in law there was used to answer the argument about motive. It did not mean that the act was not fraudulent in fact. Deliberately telling a falsehood, intending another to act on it, may be called fraudulent whatever the motive (Herschell).
22. Noted: Foster v. Charles was followed in Corbett v. Brown and then in Polhill v. Walter. Counsel relied heavily on Polhill v. Walter, because the jury negatived fraud in fact but the defendant was still held liable (Herschell).
23. Held: the jury's finding meant only that the defendant had no corrupt or improper motive. Lord Tenterden said a representation the maker knows to be untrue, intended or calculated to induce action, is a deliberate falsehood and a fraud in the legal sense (Herschell).
24. Noted: in Crawshay v. Thompson, Maule J. explained Polhill v. Walter thus: if a wrong is done by a false representation the party knows to be false, the law infers an intention to injure. Cresswell J. defined fraud in law as knowingly asserting that which is false in fact to the injury of another (Herschell).
25. Noted: in Moens v. Heyworth, Parke B. said it was essential to prove that the defendants knowingly made a representation they knew to be untrue. Lord Abinger had suggested that an action might lie where no moral blame attached (Herschell).
26. Noted: Taylor v. Ashton was an action against bank directors for fraudulent representations about its affairs. The jury found no fraud but gross negligence. Parke B. said gross negligence with damage did not give a right of action, because no one can be made responsible for such a representation unless it is fraudulently made (Herschell).
27. Noted: in Taylor v. Ashton it was said to be enough that the defendants stated an untrue fact for a fraudulent purpose while not believing it. Parke B. agreed that this would be both a legal and moral fraud (Herschell).
28. Held: this is the most emphatic declaration that fraud must be proved and nothing less will do. There is no trace of the idea that lack of reasonable grounds suffices. It is hard to see how defendants could be grossly negligent if they had reasonable grounds or took care to have them (Herschell).
29. Noted: Collins v. Evans in the Exchequer Chamber reviewed the cases. Tindal C.J. asked whether a statement false in fact, honestly made in full belief that it is true, gives a ground of action. He said the authorities from Pasley v. Freeman down lay down that fraud must concur with the false statement (Herschell).
30. Held: the Court considered fraud absent if the statement was made honestly and in full belief that it was true (Herschell).
31. Noted: in Evans v. Edmonds, Maule J. said a man with no knowledge who takes upon himself to represent facts does so at his peril. If it is to gain a benefit or deceive a third person, he is in law guilty of fraud, since he warrants his belief in the truth (Herschell).
32. Held: the foundation of that proposition is that a person who makes a statement meant to be acted on is taken to warrant his belief in its truth. If he has no such belief, he is as guilty of fraud as if he had made a representation he knew to be false (Herschell).
33. Noted: the earliest suggestion that a statement made without reasonable ground supports deceit is in Western Bank of Scotland v. Addie. The Lord President told the jury that directors' statements false in themselves, which they did not believe or had no reasonable ground to believe, were misrepresentation and deceit (Herschell).
34. Noted: Lord Chelmsford agreed. He asked how bona fides can be tested except by considering the grounds of belief. He said a belief destitute of all reasonable grounds, or one the least inquiry would correct, is fairly called misrepresentation and deceit (Herschell).
35. Held: this confuses what is evidence of fraud with what constitutes it. The grounds of belief help decide whether the belief was really held. A man's bare assertion of belief is not conclusive (Herschell).
36. Held: if Lord Chelmsford meant that a belief really held but without reasonable grounds is fraud, the earlier authorities give no warrant. A man who forms his belief carelessly, or is unreasonably credulous, may be blameworthy. But he is not fraudulent in the sense used in all the cases from Pasley v. Freeman. Even under the label fraud in law, the deception was always deliberate (Herschell).
37. Noted: he made these remarks with confidence because Lord Cranworth in the same case gave them high sanction. Lord Cranworth is quoted in the same words given in Lord FitzGerald's opinion (Herschell).
38. Held: Sir James Hannen tried to limit Lord Cranworth's words to statements of opinion. Lord Herschell thought they cannot be so limited. Lord Cranworth was considering false statements of importance about the bank's affairs and used the opinion which they had formed to mean the belief which they entertained (Herschell).
39. Held: Lord Cairns's opinions in two cases do not support deceit without fraud. In Reese Silver Mining Co. v. Smith he said persons who assert what they are ignorant of are as responsible as if they asserted what they knew to be untrue. This means persons conscious that they do not know whether it is true. That adopts Maule J.'s opinion in Evans v. Edmonds (Herschell).
40. Held: when Lord Cairns said it was not fraud in the more invidious sense, he referred only to the absence of intent to cheat or injure (Herschell).
41. Noted: in Peek v. Gurney, Lord Cairns noted the defendants had been acquitted of fraud in a criminal charge. He said that in a civil proceeding the question is whether there was misrepresentation in point of fact, however innocent the motive (Herschell).
42. Held: the false statement there was clearly knowingly made. Lord Cairns meant only that motive is immaterial if a false representation is knowingly made. That affirms Foster v. Charles, Polhill v. Walter and the other cases (Herschell).
43. Noted: in Weir v. Bell, Lord Bramwell criticised legal fraud and held that fraud in fact must be proved. Cotton L.J. there treated recklessly as without any reasonable ground for believing. In Arkwright v. Newbold he put it differently: a representation must be made with knowledge of its being false, or with a reckless disregard as to whether it is or is not true (Herschell).
44. Noted: Cotton L.J. stated the same in Edgington v. Fitzmaurice. There Bowen L.J. said the plaintiff must prove that the statement was false to the defendants' knowledge, or that they made it not caring whether it was true or false (Herschell).
45. Noted: in Smith v. Chadwick the Master of the Rolls said a man who through carelessness makes untrue statements he ought to have known were untrue is liable for deceit, despite good intentions (Herschell).
46. Held: he agreed with the last sentence but could not assent that a careless false statement, which ought to have been known to be untrue, of itself renders the maker liable in deceit. That does not necessarily amount to fraud (Herschell).
47. Noted: Jessel M.R. did not need to decide whether a careless but honestly believed statement supports deceit. He found the statement fair, honest, and bona fide and no ground for an action (Herschell).
48. Noted: Lindley L.J. in the same case said the plaintiff must prove the misrepresentation was made and was false. He must also prove it was false to the defendants' knowledge, or that they did not believe it true. That accords with earlier decisions (Herschell).
49. Noted: in the House of Lords Lord Selborne said the plaintiff must establish actual fraud and that the fraud induced the contract. Actual fraud is judged by the nature of the representations, the maker's knowledge or means of knowledge, and the intention the law imputes to natural results. Lord Blackburn indicated that actual fraud or deliberate deception was requisite (Herschell).
50. Held: the authorities establish three propositions. First, in order to sustain an action of deceit, there must be proof of fraud, and nothing short of that will suffice (Herschell).
51. Held: second, 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". He said limb (3), recklessly, is but an instance of limb (2), without belief, since a reckless maker has no real belief in the truth. To prevent a false statement being fraudulent, there must always be an honest belief in its truth. This probably covers the whole ground, for one who knowingly alleges what is false has obviously no such honest belief (Herschell).
52. Held: third, if fraud is proved, the motive is immaterial. It matters not that there was no intention to cheat or injure the person to whom the statement was made (Herschell).
53. Noted: these propositions cover all the decided cases from Pasley v. Freeman to Western Bank of Scotland v. Addie in 1867. The first suggestion that honest belief will not suffice if it lacks reasonable grounds came there and was at once dissented from by Lord Cranworth (Herschell).
54. Noted: Lord Chelmsford's view was not asserted again until Weir v. Bell, where it was treated as established law without reasons. The Master of the Rolls' dictum went further. That an action lies despite honest belief, if there were no reasonable grounds, was for the first time decided in the case under appeal (Herschell).
55. Held: making a false statement through want of care falls far short of fraud. So does a false representation honestly believed on insufficient grounds. Cotton L.J. himself said he would not call it fraud. The whole current of authority shows fraud is essential (Herschell).
56. Held: Taylor v. Ashton is in direct conflict with Jessel M.R.'s dictum and inconsistent with the Court of Appeal's view. Sir Frederick Pollock's work on Torts says Taylor v. Ashton is not consistent with modern cases on directors' duties. Lord Herschell thought he is right, but still held that nothing less than fraud makes directors or others liable in deceit (Herschell).
57. Held: when a false statement is made, whether there were reasonable grounds for belief, and the maker's means of knowledge, are most weighty matters. The ground on which a belief was founded is a most important test of its reality. A belief destitute of all reasonable foundation may itself convince the Court that it was not really held (Herschell).
58. Held: means of knowledge are very different from knowledge, as Lord Blackburn noted in Brownlie v. Campbell. But a person who shuts his eyes to the facts, or purposely abstains from inquiring, lacks honest belief. He is as fraudulent as if he knowingly stated what was false (Herschell).
59. Noted: he reached this conclusion with reluctance. Those who put a prospectus before the public should be vigilant that it contains only statements in strict accordance with fact. There is much to be said for turning this moral duty into a legal obligation, so that want of reasonable care becomes an actionable wrong (Herschell).
60. Held: that is not a matter for this occasion. If it is to be done, the legislature must intervene and expressly give a right of action. It must not be done by straining the law to call fraudulent what cannot properly be so described. Blurring the distinction between carelessness and fraud is likely to cause mischief (Herschell).
61. Noted: applying the law, the charge is that the defendants fraudulently represented that the company had a right to use steam or mechanical power under the special Act. His test was whether they knowingly made a false statement, or honestly believed it a true and fair representation (Herschell).
62. Noted: he approached the case of all defendants but Wilde inclined to scrutinise their conduct severely. They improperly received sums from the promoters, which raises suspicion. But the statement was concurred in by Wilde, who was blameless and under no pressure. That gives the case a different complexion (Herschell).
63. Held: Stirling J. carefully watched the witnesses and concluded, without hesitation, that they were witnesses of truth. Such an opinion should not be differed from except on very clear grounds. Lord Herschell saw no reason to dissent and assumed the truth of their testimony (Herschell).
64. Held: the statement did not accurately convey the company's rights. Under the 1870 Act steam needed an Act of Parliament. The power was granted but was burdened with the condition of Board of Trade consent. It was incorrect to say the company had the right to use steam. It would have that right only if it obtained consent (Herschell).
65. Noted: what would impress those connected with the company was that, after submitting the plans to the Board of Trade, they obtained a special Act empowering steam. The need for consent might not dwell on their minds if they thought consent would follow as a matter of course. The provision might seem analogous to the Board's inspection before opening a tramway or railway, which he believed is also in the Railways Act. No one treats that as limiting the right to use the line. He did not say the two are strictly analogous in law, but business men may well have thought so (Herschell).
66. Noted: Mr. Wilde, a barrister and a director of a London tramway company, knew Board consent was necessary. He thought it had practically been given, since the plans were laid before the Board stating that steam was intended, no objection was raised, and the Bill was obtained. He thought the statement perfectly true (Herschell).
67. Noted: Mr. Pethick thought the Board had no more right to refuse consent than for a railway. He thought that if reasonable requirements were complied with, it could not refuse. It never entered his thoughts that the Board would refuse (Herschell).
68. Noted: Mr. Moore understood that the consent was obtained, and that the passage represented section 35's effect. The company's solicitors told the directors' board that everything was in order for steam, that the Act had been obtained with the usual restrictions, and that they were starting with full power to use steam as other companies were doing (Herschell).
69. Noted: Mr. Wakefield believed the statement fair and never doubted it. It never occurred to him to mention Board consent, as they had the Act for steam and he presumed they would get it (Herschell).
70. Noted: Mr. Derry's evidence was somewhat confused. He knew Board consent was necessary but thought it would follow as a matter of course. The question never crossed his mind when the prospectus was issued, and he believed it correct to say they had the right to use steam (Herschell).
71. Held: the directors were mistaken in supposing consent would follow as a matter of course. It was absolutely in the Board's discretion, so the prospectus was inaccurate. But the question is whether the plaintiff proved a fraudulent misrepresentation, and he did not (Herschell).
72. Held: it is not proved of any director that he knowingly made a false statement, or one he did not believe true, or was careless whether it was true or false. They honestly believed what they asserted, and the charge of fraud was not established (Herschell).
73. Noted: it is not unworthy of note that General Hutchinson, aware of the special Act's provisions, made the same inaccuracy of language in his report to the Board of Trade (Herschell).
74. Held: witnesses' statements about their belief are not to be accepted blindfold. To judge another's state of mind, the Court applies the standard of conduct known from experience by asking whether a reasonable man would be likely so to believe (Herschell).
75. Held: applying that test, he had a strong conviction that a reasonable man in the defendants' position, with their knowledge and means of knowledge, might well believe as they did and consider the representation substantially true (Herschell).
76. Held: he concluded, adopting Jessel M.R.'s words, that the statement was "a fair, honest and bona fide statement on the part of the defendants", though in some respects inaccurate and not free from imputation of carelessness. It does not expose them to an action for deceit. The Court of Appeal's judgment should be reversed (Herschell).

Authorities

• Pasley v. Freeman, 2 Sm. L.C. 74: the leading case on deceit against a person not party to the contract. Grose J. dissented. Buller J. used Croke J.'s words on fraud and damage. Herschell began his review here; counsel for the respondent also cited it (Herschell).
• Crosse v. Gardner, Carth. 90: knowledge of the falsehood of what is asserted is fraud and deceit. Cited by Buller J. in Pasley v. Freeman (Herschell).
• Risney v. Selby, 1 Salk. 211: judgment proceeded on the ground that the defendant knew what he asserted to be false. Cited by Buller J. (Herschell).
• Haycraft v. Creasy (also Haycraft v. Cressy), 2 East 92: false affirmation about a third party's credit. It decided that knowledge of falsity is essential and belief in truth is a defence. Lord Halsbury also referred to it in argument (Herschell).
• Foster v. Charles, 7 Bing. 105: a knowingly false representation is fraud in law even without bad motive. Explained by Herschell as fraud in fact too; followed in Corbett v. Brown and Polhill v. Walter (Herschell).
• Corbett v. Brown, 8 Bing. 33: followed Foster v. Charles (Herschell).
• Polhill v. Walter, 3 B. & Ad. 114: the defendant was held liable though the jury negatived fraud in fact. Herschell read that finding as meaning no corrupt motive. Relied on by the respondent; explained by the appellants as a knowing misrepresentation (Herschell).
• Crawshay v. Thompson, 4 M. & Gr. 357: Maule J. said the law infers intention to injure from a knowingly false representation. Cresswell J. defined fraud in law (Herschell).
• Moens v. Heyworth, 10 M. & W. 157: Parke B. said it was essential to prove the defendants knowingly made a representation they knew to be untrue (Herschell).
• Taylor v. Ashton, 11 M. & W. 401: bank directors, gross negligence but no fraud found. Held no liability unless fraud. Called of great importance and in direct conflict with Jessel M.R.'s dictum (Herschell; appellants' counsel).
• Collins v. Evans, 5 Q.B. 804, 820: Exchequer Chamber held that fraud must concur with the false statement. Followed (Herschell; FitzGerald).
• Evans v. Edmonds, 13 C.B. 777: Maule J. said a man who asserts facts without knowledge does so at his peril. Read as based on the maker warranting his belief (Herschell).
• Western Bank of Scotland v. Addie, L.R. 1 H.L. (Sc.) 145: Lord Chelmsford's view that a belief without reasonable grounds may be deceit is disapproved. Lord Cranworth's contrary opinion is approved and quoted (Herschell; FitzGerald; appellants' counsel).
• Reese Silver Mining Co. v. Smith, L.R. 4 H.L. 64, 79: Lord Cairns's words on those who assert what they are ignorant of. Read as applying only to persons conscious of ignorance (Herschell).
• Peek v. Gurney, L.R. 6 H.L. 377, 409: Lord Cairns's words on innocent motive read as meaning motive is immaterial where the statement is knowingly false. Counsel for the respondent relied on the Lords' obiter dicta (Herschell).
• Weir v. Bell, 3 Ex. D. 238: Lord Bramwell criticised legal fraud. Cotton L.J. there treated recklessly as without reasonable ground. Criticised (Herschell; appellants' counsel).
• Arkwright v. Newbold (cited as Arkwright v. Newbould in one place), 17 Ch. D. 301, 320: Cotton L.J. said there is no equitable action for deceit and put the rule as knowledge or reckless disregard (Herschell).
• Edgington v. Fitzmaurice, 29 Ch. D. 459: Cotton L.J. and Bowen L.J. stated that the falsity must be to the defendants' knowledge or made not caring (Herschell).
• Smith v. Chadwick, 20 Ch. D. 27, 44, 67; 9 App. Cas. 187, 193: Jessel M.R.'s carelessness dictum is not accepted; his decision was that the statement was honest. Lindley L.J. and Lord Selborne are cited on actual fraud; Lord Blackburn agreed with the Master of the Rolls only nearly. Relied on by both sides (Herschell).
• Brownlie v. Campbell, 5 App. Cas. 925, 935, 950, 952: Lord Selborne distinguished answers to inquiries from deceit. Lord Blackburn distinguished means of knowledge from knowledge (Herschell).
• Burrowes v. Lock, 10 Ves. 470: trustee's honest but wrong answer to an intended lender. Put aside as a separate class (Herschell).
• Arnison v. Smith, 41 Ch. D. 348, 367: Lord Halsbury's earlier opinion in the Court of Appeal, which he adhered to (Halsbury).
• Chandelor v. Lopus (Cro. Jac. 4; 1 Dyer 75a; 1 Sm. L.C., 9th ed., p. 186): Popham C.J.'s opinion that knowingly selling damaged goods as good gives an action of deceit, otherwise not without warranty. Discussed by FitzGerald; cited by respondent's counsel.
• Easley v. Freeman (as printed; the footnote gives 2 Sm. L.C., 9th ed., p. 74, the same page as Pasley v. Freeman): the notes to it, with those to Chandelor v. Lopus, contain the whole law (FitzGerald).
• Jolliffe v. Baker (printed as Jolijfe v. Baker), 11 Q.B.D. 255: cited by the appellants as showing the earlier law (appellants' counsel).
• New Brunswick &c. Co. v. Conybeare, 9 H.L.C. 725, 726: Lord Westbury's obiter dictum relied on by the respondent (respondent's counsel).
• Slim v. Croucher, 1 D.F. & J. 518, 523; Evans v. Bicknell, 6 Ves. 183; Milne v. Marwood, 15 C.B. 778, 781: cited by the respondent (respondent's counsel).
• Benton v. Great Northern Railway Company, 25 L.J. (Q.B.) 129; Thorn v. Bigland, 8 Ex. 725; Smout v. Ilbery, 10 M. & W. 1, 10; Rawlins v. Wickham, 3 D. & J. 304, 312; Hallows v. Fernie, L.R. 3 Ch. 467; Mathias v. Fefts, 46 L.T. (N.S.) 497, 502: cited by the respondent (respondent's counsel).
• New Brunswick and Canada Railway Company v. Muggeridge, 1 Dr. & S. 363, 381; Henderson v. Lacon (printed Senderson v. Lacon), L.R. 5 Eq. 249: cited by the respondent on a director's duty to intending shareholders (respondent's counsel).

Also cited in footnotes and text: Benjamin on Sales by Pearson-Gee and Boyd (FitzGerald); Sir Frederick Pollock's Torts, p. 243 note (Herschell); Comyns' Digest (Bramwell); Leading Cases editors' note (FitzGerald).

Provisions mentioned

• Special Act, 45 & 46 Vict. c. clix. (24 July 1882): authorised the company to make seven tramways.
• Special Act, section 35: allows animal power, and steam or mechanical power with Board of Trade consent, subject to Schedule A and Board regulations.
• Special Act, sections 4, 5, 15, 16, 37 and 44: plans and sections; formation subject to the Board's orders; no opening until certified fit; Board bye-laws; two months' notice of steam.
• Tramways Act 1870 (33 & 34 Vict. c. 78), section 34: carriages are moved by the power the special Act prescribes, and by animal power only if none is prescribed.
• Judicature Act: mentioned by counsel as the source of Chancery judges trying deceit without juries.

Judgement

1. The order of the Court of Appeal is reversed.
2. The order of Stirling J. is restored.
3. The respondent must pay the appellants their costs below and in the House of Lords.
4. The cause is remitted to the Chancery Division.

The order was entered on the Lords Journals of 1 July 1889. The solicitors for the appellants were Linklater, Hackwood, Addison & Brown. The solicitors for the respondent were Tamplin, Tayler & Joseph.

Legal Principle / Ratio

In an action of deceit the plaintiff must prove actual fraud. Fraud is proved when a false representation is made knowingly, without belief in its truth, or recklessly. An honest belief defeats the claim, even if it lacked reasonable grounds. Lack of grounds can still show the belief was not real. The key holding is that "there must be proof of fraud, and nothing short of that will suffice".

Critical Analysis

Analysis based on the judgment text.

• The Court accepted that the statement was inaccurate. Lord Halsbury and Lord Bramwell called it untrue, and Lord Herschell called it inaccurate, but the claim failed on the state of mind.
• Lord FitzGerald reached a different first step. He thought the statement not untrue in a business sense. He reached the honesty finding as a second, alternative ground.
• Lord Bramwell rejected any legal right to have true statements only made. Lord Herschell instead spoke of a moral duty that the legislature might make a legal one.
• Lord Herschell said honest belief without reasonable grounds is not fraud. Yet he warned that lack of reasonable grounds, or shutting one's eyes to the facts, can show that no honest belief existed.
• Lord Herschell said carelessness in prospectuses might deserve a legal remedy, but that the legislature must give it. Lord Bramwell said only that a statutory warranty of prospectus statements might be enacted.
• Lord Halsbury had doubts on both the facts and inducement. He agreed in reversing, because the directors' innocence was consistent with the facts.

Significance

• The House of Lords fixed the meaning of fraud for an action of deceit. It rejected the Court of Appeal's wider test of belief without reasonable grounds.
• It separated deceit from an action to rescind a contract for misrepresentation. Rescission needs only proof of misrepresentation, however honest.
• It confirmed that motive is immaterial where a false statement is knowingly made.
• It put the burden on the plaintiff to prove dishonesty, though the reasonableness of the grounds remains evidence.
• Lord Herschell said that liability for careless prospectus statements would need legislation. Lord Bramwell suggested a statutory warranty.

Exam-Important Points

• Rule first: fraud means a false representation made knowingly, without belief in its truth, or recklessly, careless whether it be true or false.
• Rule: an honest belief is a defence to deceit, even if the belief was carelessly formed.
• Trap: want of reasonable grounds is not itself fraud. It is evidence that the belief may not have been real.
• Trap: a person who shuts his eyes to the facts, or abstains from inquiry, has no honest belief and is fraudulent.
• Trap: the case is about deceit, not rescission. Rescission needs only misrepresentation, however honestly made.
• Trap: motive is immaterial once a knowingly false statement is proved. No intent to cheat or injure is needed.
• Cases: Pasley v. Freeman (start of the line), Taylor v. Ashton (followed on the fraud requirement), Western Bank of Scotland v. Addie (Lord Cranworth preferred to Lord Chelmsford), Smith v. Chadwick (Jessel M.R.'s dictum not accepted).
• Fact trap: the appellants were five directors (Derry, Wakefield, Moore, Pethick and Wilde), and the House restored Stirling J.'s order.

Prepared from the full text of the judgment. The judgment has no numbered paragraphs, so each judge's opinion is cited by name. The citation is not in the judgment text.