Derry v Peek

(1889) 14 Appeal Cases 337House of Lords1889Company Law, Law of Torts, Law of Contract I

Rule established

Fraud requires knowledge of falsehood or recklessness; honest belief in truth, even if unreasonable, negates fraud.

Facts

Directors of a tramway company stated in the prospectus that the company had the right to use steam power (instead of horses)
They honestly believed this was true based on their application to the Board of Trade, but the permission was actually discretionary and was ultimately refused
The company failed and shareholders sued for fraud

Issue

Whether directors who honestly believed a false statement was true can be liable for fraud (deceit).

Held

Fraud requires: (1) knowledge that the statement is false, OR (2) belief that it is false, OR (3) recklessness, not caring whether true or false
An honest belief in truth, even if unreasonable, negates fraud
The directors honestly believed they would get permission and were therefore not fraudulent
Mere negligence or unreasonable belief is NOT fraud

Ratio Decidendi

Fraud (deceit) is established only where a false statement is made knowingly, without belief in its truth, or recklessly (not caring whether true or false). Honest belief in the truth of the statement, however unreasonable that belief may be, is a complete defence to fraud. Negligence alone does not constitute fraud.

How to use it in an exam

Part A: Definitive authority for the mental element required for fraud.
Part B: This left a gap: negligent misstatement causing loss had no remedy (filled later by statute and Hedley Byrne [1964] for negligent misstatement tort).
Key line: "Fraud = false statement made knowingly, without belief in its truth, or recklessly."
Indian application: Section 17 ICA defines fraud; Derry v Peek's mental element test informs interpretation.

Source

Source: (1889) 14 Appeal Cases 337

This is an educational summary, not the judgment itself. Cite the reported version in professional or academic work.

Cited in study notes

Law of Contract IMisrepresentationDistinguishes fraud from innocent/negligent misrepresentation

Law of Contract IFraudDefines the mental element of fraud

Company LawProspectus and Liability for MisstatementExplains why statutory liability was needed beyond fraud