Derry v Peek [1889]

Derry v Peek [1889] UKHL 1 is a landmark case in English contract law that delves into the realms of fraudulent misrepresentation and the tort of deceit. The case established a pivotal 3-part test for fraudulent misrepresentation, asserting that a defendant is fraudulent if they either (i) know the statement to be false, (ii) do not believe in the statement, or (iii) are reckless as to its truth.

The Plymouth, Devonport and District Tramways company issued a prospectus, falsely claiming to have permission to use steam trams. The reality was that the company did not possess such permission, as it was contingent on the Board of Trade's consent. The company, honestly believing they would obtain permission, applied for it after the prospectus was issued. However, permission was ultimately denied, leading to the company's liquidation.

Shareholders, led by Sir Henry Peek, who had invested in the company based on the misrepresented statement, sued the directors for misrepresentation. The House of Lords, in its judgment, held that the shareholders' action failed because it was not proven that the directors lacked an honest belief in what they had stated. Lord Herschell noted that while the unreasonableness of the grounds of belief is not necessarily deceitful, it can serve as evidence from which deceit may be inferred.

This case underscored the crucial requirement for establishing the tort of deceit, emphasising that the misstatements must be fraudulently made. The case validated the majority judges' perspective in the Court of Appeal in Heaven v Pender [1883], asserting that deceit or fraud necessitates showing that a defendant either knows a statement is untrue, has no belief in its truth, or is reckless as to its truth or falsity.

Importantly, the case clarified that no duty would be imposed concerning non-fraudulent misrepresentation in the absence of a contract, a fiduciary relationship, fraud, or deceit. However, this stance was later overruled in Hedley Byrne v Heller [1964].

The finding that the directors had an honest belief in the statement in Derry v Peek raised questions given the evidence suggesting their awareness that they did not yet have the required permission. Despite this, the court's decision emphasised the significance of proving fraudulent intent to establish the tort of deceit.
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