Law of Torts
The Tort of Deceit: Fraudulent Misrepresentation, Derry v. Peek, and the Distinctions from Negligence and Contractual Misrepresentation
Deceit is the tort of fraudulent misrepresentation: a false statement of fact, made knowingly or recklessly, intended to be acted upon, acted upon by the plaintiff, and causing him loss. It is the most demanding of the misstatement torts, because it requires proof of a guilty mind, and the standard of proof applied to an allegation of fraud is correspondingly exacting. Derry v. Peek settled what fraud means and, in doing so, created the gap that Hedley Byrne filled seventy four years later.
The five essentials, Derry v. Peek, and the distinctions from negligent misstatement and contractual misrepresentation
1. The Five Essentials
The essential | What it requires |
A false representation of fact | By words or by conduct, of existing fact and not of opinion, intention or law |
Knowledge of its falsity | Made knowingly, or without belief in its truth, or recklessly careless whether it be true or false |
An intention that the plaintiff act on it | The plaintiff must be a person, or one of a class, whom the maker intended to influence |
Reliance in fact | The plaintiff must have acted on the representation, and it must have been a material inducement |
Damage resulting | Deceit is not actionable per se |
2. A False Representation of Fact
- It may be made by words or by conduct. Dressing a defective article so as to conceal the defect is a representation as surely as a statement about it.
- It must be of existing fact, and not of opinion, of intention, or of law.
- But a statement of opinion implies that the maker holds it, and a statement of intention implies that he has it. The state of a man's mind is as much a fact as the state of his digestion, so a person who states an intention he does not have makes a false statement of fact.
- A statement of opinion by a person with special knowledge may imply that he has reasonable grounds for it, and is false if he has none.
- Silence is not ordinarily a representation, there being no general duty to disclose. It becomes one where there is a duty to speak, as in a contract uberrimae fidei; where a half truth is told, literally accurate but misleading by what it omits; and where a statement true when made becomes false before it is acted on and the maker knows it.
- A mere sales puff is not a representation of fact, being understood by everybody as commendation rather than assertion.
3. Derry v. Peek and the Meaning of Fraud
📖 Derry v. Peek (1889) 14 App Cas 337 Facts A tramway company was empowered by a special Act to make and maintain tramways, and to use animal power or, with the consent of the Board of Trade, steam or mechanical power. The directors issued a prospectus stating that the company had the right to use steam power instead of horses, which would produce large economies. They honestly believed that the consent of the Board of Trade was a mere formality and was certain to be given. The Board refused consent for most of the line, the company was wound up, and a shareholder who had subscribed on the faith of the prospectus sued the directors in deceit. Held The directors were not liable. They had honestly believed what they said. Ratio Fraud is proved when it is shown 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. The second and third are really instances of the first, since a man who has no belief in the truth of what he says is being dishonest. An honest belief in the truth of the statement negatives fraud, however unreasonable the belief may be and however careless the maker was in arriving at it. Negligence, however gross, is not fraud. To establish deceit nothing short of dishonesty will do. |
- The decision was thought at once to leave a gap. A careless adviser on whom a person reasonably relied was immune, however incompetent, so long as he believed what he said.
- Parliament filled part of the gap immediately by the Directors' Liability Act 1890, imposing liability on directors for untrue statements in a prospectus unless they had reasonable ground to believe them true. The successor provisions in Indian company law take the same approach.
- The common law filled the rest of the gap in 1963 in Hedley Byrne and Co. Ltd. v. Heller and Partners Ltd. [1964] AC 465, which is the subject of TORT 075.
- Recklessness in this sense is not carelessness. It means indifference to whether the statement is true, which is a species of dishonesty, and not a failure to take care in checking.
4. Intention, Reliance and Damage
- The representation must have been intended to be acted on by the plaintiff, either as an individual or as a member of a class the maker intended to influence. A statement in a prospectus is intended to be acted on by subscribers.
- The plaintiff must in fact have relied on it. The claim fails if he did not believe the statement, if he relied on his own independent inquiry, or if he never knew of the representation at all.
- It need not have been the sole inducement, so long as it was a material one that played a real part in his decision.
- That the plaintiff could have discovered the truth by inquiry is no defence. A person who tells a lie cannot complain that the person he lied to believed him.
- Damage must be proved, deceit not being actionable per se.
- The measure is generous. The defendant is liable for all the loss flowing directly from the transaction entered into on the faith of the representation, whether or not that loss was foreseeable, which is a marked departure from the ordinary rule of remoteness in negligence.
5. Deceit and Negligent Misstatement
Deceit | Negligent misstatement | |
The state of mind | Dishonesty: knowledge of falsity, absence of belief, or recklessness | Carelessness only |
Is a duty of care required | No. The dishonesty is the wrong | Yes. A special relationship and an assumption of responsibility must be shown |
Remoteness | All loss flowing directly from the transaction, foreseeable or not | Only loss of a foreseeable kind |
Contributory negligence | Not a defence | Available, and damages are apportioned |
Exclusion by disclaimer | A fraudulent representation cannot be excluded by a disclaimer | An effective disclaimer negatives the assumption of responsibility |
Pleading | Fraud must be specifically pleaded with full particulars | Pleaded as ordinary negligence |
6. Deceit and Misrepresentation in Contract
Deceit, the tort | Misrepresentation in contract | |
The source | The law of torts | A vitiating factor in the formation of a contract |
Between whom | Anyone who made the representation and anyone intended to act on it | The contracting parties |
The remedy | Damages | Rescission, and restoration of benefits: sections 18 and 19 of the Indian Contract Act, 1872 |
The state of mind | Dishonesty is essential | An innocent misrepresentation suffices to make the contract voidable |
The overlap | Fraud under section 17 of the Indian Contract Act, 1872 closely tracks deceit | A fraudulent misrepresentation gives both rescission of the contract and damages in tort |
- Section 17 of the Indian Contract Act, 1872 defines fraud to include the suggestion as a fact of that which is not true by one who does not believe it to be true, the active concealment of a fact by one having knowledge or belief of the fact, a promise made without any intention of performing it, and any other act fitted to deceive.
- Section 19 makes a contract induced by fraud voidable at the option of the party whose consent was so caused, and allows him, if he thinks fit, to insist that the contract be performed and that he be put in the position he would have been in had the representation been true.
- The two commonly arise on the same facts, and a plaintiff will frequently plead both.
⚠ Why fraud must be pleaded and proved so strictly Two procedural rules attach to every allegation of fraud, and both follow from the gravity of the charge. The first is that fraud must be specifically pleaded, with full particulars of the representation, of who made it, when, to whom, and of the facts relied on as showing dishonesty. A general allegation that the defendant acted fraudulently is not a plea of fraud at all, and will be struck out. The second is that the standard of proof, while remaining the civil standard of the balance of probabilities, is applied with a corresponding weight: the more serious the allegation, the stronger the evidence required before a court will find it proved, because a court does not lightly conclude that a person has been dishonest. The practical consequence for a plaintiff is that an allegation of fraud is a difficult and expensive one to run, and that a claim in fraud which fails does not automatically convert itself into a claim in negligence: if negligence is to be relied on in the alternative, it must be pleaded as such. |
7. The Position Stated Shortly
1. Deceit requires a false representation of fact, knowledge of its falsity, an intention that the plaintiff act on it, reliance, and damage.
2. The representation must be of existing fact, though a statement of opinion implies that the maker holds it and a statement of intention that he has it.
3. Silence is not ordinarily a representation, save where there is a duty to speak, a half truth, or a change of circumstances known to the maker.
4. Derry v. Peek holds that fraud is proved where a false representation is made knowingly, without belief in its truth, or recklessly careless whether it be true or false.
5. An honest belief negatives fraud however unreasonable it is, and negligence however gross is not fraud.
6. The decision left a gap which the Directors' Liability Act 1890 partly filled and which Hedley Byrne v. Heller closed in 1963.
7. That the plaintiff could have discovered the truth by inquiry is no defence to a person who told him a lie.
8. The measure of damages in deceit is all loss flowing directly from the transaction, whether foreseeable or not.
9. Contributory negligence is no defence to deceit, and a fraudulent representation cannot be excluded by a disclaimer.
10. Fraud under section 17 of the Indian Contract Act, 1872 closely tracks deceit, and a contract induced by it is voidable under section 19.