This article is written by Aditya Narayan Joshi. This article focuses on the concept of Fraudulent Misrepresentation under common law, tracing its developments and analysing the case, Derry v. Peek.

Introduction

Anyone who runs a business understands that most transactions and agreements are sealed by a contract, even if it’s just a handshake. Contract law at its heart governs the transition of privileges from one entity to another, requiring each entity to account for the conditions decided upon. Under every deal, it is of paramount importance that all sides are on the same page and behave under good faith. But if one party makes a false or misleading assertion to force another party into a deal, which may inflict some form of damages, the grieved party can sue for this action.

This breach of social obligation through fraudulent misrepresentation also give rise to tortious liability and is a very important and discussed concept of law of tort. A contract shall not be considered binding until the terms are agreed by both parties. When the terms presented are wrong, then the arrangement is based on a false assumption, and the contract is void. Knowingly making false claims— whether in writing, verbally, through a simple gesture, or just through silence— is a false misrepresentation if it has a material impact on the contract.

Representation and Misrepresentation

“A representation is defined as a statement made by one of the two contracting parties to the other before or at the time of making the contract, in regard to some fact, circumstance, or state of facts pertinent to the contract, which is influential in bringing about the agreement.”

During the initial times in common law when the law was evolving fraud and misrepresentation were just seen as cheating or false projection on the part of one of the contracting parties. However, the ambit and importance of fraud and misrepresentation became more lucid with the test of time and dealing with fresh cases of the same. One of the important cases among those was the case of Derry v. Peek which became a plinth for the evolution of misrepresentation in common laws.

For a long time, it was assumed that there should be no blame in tort for an intentionally rendered false declaration, however incompetent the author may have been and however devastating the consequences: a reckless person is not a dishonest one. Eventually, however, the House of Lords held that there might be an obligation of care on the creator of a statement under such cases, and therefore that an individual can be honestly but negligently kept responsible for a false statement.

Such liability cannot be fooled— it is the result of incompetence and not deception— but its nature has a significant effect on liabilities for statements as a whole. Whether there may be damages in negligence it might be of nothing more than the theoretical value that an allegation founded on deception is fatal to the absence of dishonest motive. Nonetheless, the tort has not been removed because the defendant will have reasonable cause to try and create a case of fraud (for example, there is no requirement to impose an obligation dependent on a special partnership, that could allow him to circumvent a clause that may otherwise be legitimate, his argument cannot be fulfilled with an accusation of contributory negligence and the laws on liability would be more stringent).

An argument focused on deception cannot, therefore, be put in without specific directions and reliable evidence to justify it. This must be pleaded unambiguously and taken before the defendant, and it must be specifically shown that deception is actually less probable than Negligence.

“A misrepresentation is a misleading assertion of a material truth rendered by one party that influences the judgment of the other party in committing to a contract. If the misrepresentation is found, the contract will be deemed invalid and, based on the situation; restitution can be obtained from the adversely affected group. The entity who rendered the misrepresentation is the claimant in such a legal case, and the aggrieved party becomes the complainant.”

The requirements for the common law action of deceit may be summarised as follows:

(1) There must be a representation of fact made by words or conduct;

(2) The representation must be made with knowledge that it is or may be false, or at least made in the absence of any genuine belief that it is true;

(3)The representation must be made with the intention that it should be acted upon by the claimant, or by a class of persons which includes the claimant, in the manner which resulted in damage to him;

(4) It must be proved that the claimant has acted upon the false statement;

(5) It must be proved that the claimant suffered damage by so doing.

Derry v. Peek as a landmark case in determining the scope of fraud & misrepresentation

(WILLIAM DERRY, J. C. WAKEFIELD, M. M. MOORE, J. PETHICK, AND S. J. WILDE v. SIR HENRY WILLIAM PEEK, BARONET)

Derry v. Peek’s details were that a tram company’s executives published a prospectus saying they had legislative authority to use steam to drive their trams. In addition, the Board of Trade consented to the granting of these powers. Honestly yet wrongly, the directors assumed that giving this consent was a pure procedural matter; nevertheless, it was denied.

In effect, the company was wound up and the complainant, who had acquired stock in it on the prospectus ‘ trust, launched a lawsuit against the directors for deceit. The House of Lords, overriding the Court of Appeal’s ruling, issued judgement for the guilty, claiming that a misleading assertion rendered carelessly and without fair reasons to assume it to be valid might not constitute deception, while it must include proof of it. A reckless person is not a deceitful person and there is no amount of reasoning that can show that he is one.

Nevertheless, dishonesty is not acceptable in the criminal law context, and the offender is not excused from a conviction that this misrepresentation is standard procedure or would promote the transaction. This should be remembered that the development of the rule by Lord Herschell as involving sincere confidence in the validity of the argument was provided in the sense of a speech by advocates, who had a totally free option as to what they were doing. It has been stated that it does not automatically conclude that an individual is directly guilty of deception when he makes a comment on a senior officer’s order and has any doubt about his accuracy.

Lord Herschell’s classic formulation

“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. Although I have treated the second and third as distinct cases, I think the third is but an instance of the second, for one who makes a statement under such circumstances can have no real belief in the truth of what he states. To prevent a false statement being fraudulent, there must, I think, always be an honest belief in its truth.”

The House of Lords found that the intervention of the shareholders failed as the director was not proven to show true confidence in what they had written. However, Lord Herschell points out that although unreasonableness of the basis of conviction is not deceptive, it is proof from which deception may be derived. There are other instances, “where the fact that an accused conviction was destitute of some fair basis should be enough by itself to persuade the court that it was not really entertained and that the interpretation was a false one.”

The deception manipulation can only have been created if the misstatements had been rendered fraudulently. The possibility of plurality judges at the Court of Appeal in Heaven v Pender was thereby confirmed by Derry v Peek. That is to suggest, in order for it to be deception or theft (which is the same), it must be proven that a claimant understands that an assertion is incorrect or has no confidence in its validity, or that it is inaccurate or false.

Derry v. Peek further clarified that in relation to reckless misrepresentation no obligation should be imposed in the existence of a contract, fiduciary agreement, deception or deceit. This was eventually overruled in Hedley Byrne v. Heller.

Contemporary Reference

The House of Lords agreed that a corporation has no general obligation when presenting a prospectus, to use “care and ability” in order to prevent any mistakes. For situations where economic risk arises from non-fraudulent errors, this argument is no longer reasonable practice. This case was covered by legislation under corporate law, codified now in the Companies Act, 2006, which also acknowledges the basic value of complete transparency of capital markets of order to prevent financial crises.

Views on the Case

The Law of deceit as established in Derry v. peek represented the judicial position of circumscribing a claim dependent on intentional and competent misrepresentation and thereby rendering reckless and unfair misrepresentation outside the scope of the statute at the period. This may be argued that this approach balances between a need to prevent bribery and facilitate transparency on the representatives ‘ sides and to foster vigilance on the part of the members.

However, Derry v. Peek’s opinion remained an obstacle to the advancement of recourse for wrongful misrepresentation not just in the lower courts, but also in the House of Lords until the 1960s. The decision occasioned several spirited criticism, and, indeed, the position of directors issuing prospectuses was regulated by Parliament soon afterwards with the passage of an act made in UK.

Further Developments

For order to create the rule on malicious misrepresentations, one would not need to look much farther than Derry v. Peek. The case is of indirect relevance to the law of negligence. Implicate in the judgment in Derry v. Peek was the principle that, in the absence of any fiduciary or contractual relationship between the parties, there was no remedy for merely negligent misappropriation, honestly believed, where the damage caused to the plaintiff was merely a financial loss. This doctrine implied in Derry v. Peek was supported in subsequent judgments, including Nocton v. Lord Ashburton, 10 Woods v. Martins Bank, Burke v. Cory, Cann v. Willson, LeLievre v. Gould, Old Gate Estates v. Toplis, Candler v. Crane, Christmas.

Negligent misappropriation certainly does not amount to deceit, and negligent misappropriation can only be a cause of action if there is a duty to be careful-not to give information after careful investigation. In Derry v. Peek, the House of Lords took the view that the circumstances did not raise such a duty. This view of the law was supported by Cohen, L. J., in Candler, and was further supported by the leading textbook writers of the day. Cohen, L. J., said’, the learned editor of the paper on Torts Expresses the view that, with certain exceptions, there is no materiality in the present case “a false statement is not actionable as a tort unless it is wilfully false. Mere negligence in the making of false statements is not actionable either as deceit or as any other kind of tort. “

Derry v. Peek’s criticism stemmed from the difference between physical and economic harm incurred by the case. The distinction was already established in American law in Glanzer v. Shepard in 1922, where a third party was permitted to recover having suffered economic damage. Prior to Hedley Byrne, Dr Charlesworth stated in his book on the Law of Negligence the legal theory concerning the distinction between economic and physical harm. The case of Derry v. peek was finally overruled by Hedley Byrne & Co Ltd v Heller & Partners Ltd.

With House of Lords ruling in Hedley Byrne Co., Ltd. v. Heller Co-Partners, Ltd., has made a significant inroad into the life of this principle. Words were by no way placed on a par with sticks and stones, but a concession was made to the probability that certain words could be as dangerous as physical injuries at least. The omnipotence in this field of Derry v. Peek, embodying the greatest form of laissez-faire individualism of the nineteenth century into English law, has been ruled to be evident rather than actual. A remedy for financial damage resulting from a careless statement was thought to occur only in extraordinary circumstances before the recent ruling.

It was believed that no remedy existed unless deception was shown to be in an action in tort for cheating, or prejudice could be shown to occur in order to bring an action in the contract, or the facts were found to fall into one of the categories of fiduciary relationships where equity provided a special defence. The liability for false statements has taken a major step forward. Where a special partnership occurs and liability is not expressly disclaimed, a duty of care is placed to make non-negligent declarations.

The House of Lords ruled that damage for pure economic loss could arise in situations where the following four conditions were met:

(a) A fiduciary relationship of trust & confidence arises/exists between the parties;

(b) The party preparing the advice/information has voluntarily assumed the risk;

(c) There has been reliance on the advice/info by the other party; and

(d) Such reliance was reasonable in the circumstances.

Certain forms of economic loss lawsuits were attempted in the years following Hedley Byrne and were often successful. Defective goods, including construction schemes, were held to result in liability, culminating in Anns v. Merton London Borough Council where the court ruled that incompetent negligence by a council resulting in cracks on a building from inadequate foundations led to’ real physical injury’ rather than mere economic failure in order to recover damage from repair costs. This case was followed five years later before a significant change in the legal environment led to the overruling of the decision.

Finally, after all these developments this law finally got no concrete but a strong shape.

In order to prevail in a lawsuit for fraudulent misrepresentation, the plaintiff must be able to prove the following six elements:

1. A representation was made (in contract law, a representation is any action or conduct that can be turned into a statement of fact).
2. The representation was false.
3. The representation, when made, was either known to be false or made recklessly without knowledge of its truth.
4. The representation was made with the intention that the other party rely on it.
5. The other party did, in fact, rely on the representation.
6. The other party suffered damages as a result of relying on the representation.

Damages for the Tort

Depending on the nature of the case, remedies for fraudulent misappropriation may include cancelation of the contract and damages. Rescission of the contract is the most common remedy, since it is invalidated by fraudulent misappropriation (as opposed to simply’ void’). The parties may therefore choose not to rescind the contract-which restores the parties to their pre-contractual positions-if this is not possible. With regard to damages, only the actual losses resulting from the misappropriation may be claimed.

Suggestive Developments & Conclusion

Although a great deal of work has been done on the interpretation of legal texts, very little has been done on how interpretation works within the law of deception or misrepresentation. This field has scope for more study. The second is the dynamic connection between the deceit laws and the sovereignty of individuals. Since deceit interferes with the sovereignty of the hearer, we control it more easily than we do other types of coercion and often deceit vitiates what might otherwise be constitutionally valid agreement. Around the same moment, an association in speaker control inhibits the enforcement of innocent lies.

However, a suggestion is that the courts are still in a dilemma when differentiating between innocent misrepresentation and deceitful misrepresentation comes as an obstacle for the delivery of justice for this specific benchmarks should be declared by the court apart from general rules such as recklessness and knowledge as a tester for the liability. The courts need to be more specific while dealing with such grey issues like the tort of deceit cause it not only vitiates the essence of the contract but also harms the contracting parties. Yes, it’ll not be wrong to say that law of deceit both in Law of tort and Law of contract plays a significant role and simultaneously determines the fate of the two domains and it’s true that the landmark case of Derry v. Peek has moulded the development of this law in England to such an extent that it has made the law a very rigid and at the same time a dynamic opine of the House of Lords.

References

• Lexico dictionary,  Misrepresentation https://www.lexico.com/definition/misrepresentation
• Black’s Law Dictionary[4th ed. 1951]
• Derry v. Peek (1889) 14 App. Cas. 337
• Byrne v. Heller AC 465,, 2 All ER 575,, 3 WLR 101,, UKHL 4
• Glanzer v. Shepard, 194 App. Div. 693 (N.Y. App. Div. 1921)
• Anns v Merton London Borough Council [1978] AC 728
• Murphy v Brentwood District Council [1991] 1 AC 398
• Edwin Peel et al., Winfield and Jolowicz on tort (1971). 19th edition 2014
• Tort Law and Alternatives: Cases and Materials 1971
• Peter MacDonald Eggers, Deceit: The Lie of the Law.
• Accountants’ Professional Negligence: Developments in Legal Liability
• [1951 J 2 K.B. 164, 201. citing Salmond (10th ed.) p. 580

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