Derry v. Peek (1889) LR 14 AC 337

Quick Summary

This case fixes the line between fraud (deceit) and mere carelessness in prospectus statements. The directors said they could use steam power, expecting approval from the Board of Trade. Investors relied on this. Approval was later refused and the company failed. The House of Lords held: no deceit without fraud. Honest belief, even if wrong, is not fraud.

Citation

LR 14 AC 337 (House of Lords, 1889)

Court

House of Lords

Keywords

Deceit, prospectus, misrepresentation, honest belief, negligence vs fraud

Issues

• Does a false prospectus statement make the company liable for deceit?
• Is honest but mistaken belief enough to defeat a fraud claim?

Rules

• Deceit test: False statement made knowingly, without belief in its truth, or recklessly (not caring if true/false).
• Negligence ≠ fraud: Carelessness or absence of reasonable grounds, alone, does not prove deceit.
• Burden: The claimant must prove fraud; suspicion is not enough.

Facts (Timeline)

Arguments

Judgment (House of Lords)

• Appeal allowed: Court of Appeal reversed; trial judgment restored.
• No fraud proved: Directors held an honest belief that approval would come.
• Principle: Deceit demands fraud; mere absence of reasonable grounds is not enough by itself.

Ratio

A statement in a prospectus is deceit only if it is made knowingly false, without belief in its truth, or recklessly. Honest belief defeats a fraud claim, even if the belief later proves wrong.

Why It Matters

• Sets a high bar for fraud in statements to investors.
• Separates fraud from negligence in company disclosures.
• Frames later growth of negligence-based liability in economic loss.

Key Takeaways

1. Fraud = knowledge of falsity or reckless disregard.
2. Honest belief can defeat deceit, even if mistaken.
3. Negligence alone does not equal deceit.
4. Burden of proof for fraud lies on the claimant.

Mnemonic + 3-Step Hook

Mnemonic: F-R-A-U-D — False knowingly, Reckless, Absence of honest belief, Unable to show care is not enough, Deceit proven only then.

1. Ask: Did they know or not believe the statement?
2. Check: Was it reckless—no care if true or false?
3. Conclude: If only careless, it is not deceit.

IRAC Outline

Issue: Whether the false prospectus statement amounts to deceit.

Rule: Fraud requires knowledge of falsity, no belief in truth, or reckless disregard.

Application: Directors honestly expected approval; evidence did not show fraud.

Conclusion: No deceit; claim fails.

Glossary

Deceit (Fraud)

Tort requiring proof of fraudulent falsehood as to fact.

Recklessness

Making a statement without caring whether it is true or false.

Prospectus

Public invitation to invest that contains company information.

Student FAQs

Related Cases

• Cases on negligent misstatement (economic loss).
• Prospectus liability and disclosure standards.