Deceit

Negligent misstatement

The state of mind required

Fraud: knowledge of falsity, absence of belief in truth, or recklessness

Carelessness

An honest but careless statement

Not actionable

Actionable, if the relationship exists

Duty of care

Not required. The tort lies against anybody

Essential. There must be a special relationship

To whom liability extends

Anyone the maker intended to act on the statement

Only those within the relationship, and for the purpose for which it was made

Remoteness

All loss directly flowing from the deceit, whether foreseeable or not

Only loss of a foreseeable kind, under The Wagon Mound

Contributory negligence

No defence

Reduces the award

Exclusion of liability

Cannot be excluded by contract

May be excluded or limited, subject to reasonableness

Exemplary damages

Available in a proper case

Not ordinarily

Limitation

Time runs from discovery of the fraud: section 17 of the Limitation Act, 1963

Time runs from when the damage occurs

Standard of proof

Higher in practice. Fraud must be strictly pleaded and clearly proved

The ordinary civil standard

📖 Derry v. Peek, (1889) 14 App Cas 337

Facts The directors of a tramway company issued a prospectus stating that the company was entitled to use steam power instead of horses. They honestly believed this, having assumed that the consent of the Board of Trade, which the special Act required, would follow as a matter of course. The consent was refused, 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 believed the statement to be true.

Ratio Fraud is proved when it is shown that a false representation has been made knowingly, or without belief in its truth, or recklessly, careless whether it be true or false. To prevent a false statement from being fraudulent there must always be an honest belief in its truth, and a belief however unreasonable, provided it is honest, negatives fraud. Negligence is not fraud, and a want of reasonable ground for believing the statement is evidence of dishonesty but is not dishonesty itself.

📖 Hedley Byrne and Co. Ltd. v. Heller and Partners Ltd., [1964] AC 465

Facts Advertising agents, before committing themselves to credit on behalf of a client, asked their bank to enquire into the client's financial position. The client's bank gave favourable references, expressed to be "without responsibility". The client went into liquidation and the agents lost some seventeen thousand pounds.

Held The disclaimer protected the bank, but the House of Lords held that a duty of care would otherwise have arisen.

Ratio Where a party seeking information from another, possessed of a special skill, trusts him to exercise due care, and that party knows or ought to know that reliance is being placed on his skill and judgment, a duty of care arises. The relationship must be equivalent to contract, and the maker must have assumed responsibility for the accuracy of what he said. Derry v. Peek was explained as deciding only what fraud requires, and not as denying a duty of care in a proper relationship.

Why it matters

Remoteness

In deceit the defendant answers for all loss directly flowing from the fraud, foreseeable or not. In negligent misstatement The Wagon Mound applies and unforeseeable kinds of loss are excluded. The difference can be very large in a commercial case

Contributory negligence

No defence to deceit, because a fraudster cannot complain that his victim was gullible. It reduces a claim in negligent misstatement, sometimes substantially, since a commercial plaintiff who made no enquiries of his own is at fault

Exclusion clauses

Liability for fraud cannot be excluded by contract at all. Liability for negligence may be, and a well drafted disclaimer is often a complete answer, as Hedley Byrne itself shows

Limitation

Under section 17 of the Limitation Act, 1963, where the suit is based on fraud, time does not begin to run until the plaintiff has discovered it or could with reasonable diligence have discovered it. There is no such extension for negligence, where time runs from the damage

⚠ Why the law waited seventy four years to fill the gap Derry v. Peek left

Derry v. Peek did not decide that a careless statement causing loss should go unremedied. It decided only what the tort of deceit requires, which is dishonesty, and the House of Lords in Hedley Byrne said so expressly. But the practical effect of the decision for three quarters of a century was that there was no remedy at all, because the law of negligence as it then stood did not extend to words or to purely economic loss, and Donoghue v. Stevenson in 1932 was about a defective product and a physical injury. What made the gap tolerable for so long, and what explains the caution with which it was eventually closed, is that statements travel in a way that acts do not. A manufacturer's carelessness harms whoever consumes the product, and that class is naturally limited. A carelessly worded reference, valuation or set of accounts may be passed from hand to hand and relied on by people the maker never heard of, for purposes he never contemplated, years later, and each of them may lose a fortune. That is the danger Cardozo C.J. described as liability in an indeterminate amount for an indeterminate time to an indeterminate class, and the requirements the courts have built around the duty, the special relationship, the assumption of responsibility, the purpose for which the statement was made and the class known to be relying, are all devices for holding that danger in check. They are why Caparo decided that an auditor owes nothing to an investor, and why a disclaimer remains, as it was in Hedley Byrne itself, the simplest and most effective answer of all.