Trace Your Case

DERRY V. PEEK

Derry v. Peek, 1889 LR 14 AC 337.

ISSUE:

  • Is it dishonest when a business creates a prospectus to entice investors but it later turns out to be false?

RULE:

  • A single misrepresentation is insufficient to establish dishonesty. Deception must be proven; a deceptive statement made carelessly or without good cause to believe it to be true may not qualify.

FACTS:

  • In a prospectus sent to the plaintiff on the establishment of the defendant’s business, it was stated that the business would be granted the right to employ mechanical or steam power. After obtaining the prospectus, the plaintiff purchased company stock, relying on its claims and thinking the business had full authority to employ mechanical or steam power.
  • The company was shut down because it was unable to finish its task since the board of trade forbade the use of mechanical or steam power.
  • After then, Plaintiff filed a lawsuit against the defendant for making false statements. The trial judge dismissed the case after finding that the directors knew that the usage of steam or mechanical power was dependent on the board of trade and that their reliance on the board was not unreasonable nor dishonest.
  • On appeal, the dismissal was overturned because the court determined that the Defendants should be held accountable for the Plaintiff’s reliance on the prospectus since they did not have a legitimate basis for their statements in it.
  • The defense filed an appeal.

HELD:

  • The House of Lords overturned the court of appeals’ ruling and upheld the decision of the lower court.
  • The court determined that this was an act of deceit, under which proving responsibility requires more than just establishing misrepresentation.
  • Plaintiff, in this case, relied on the prospectus, which may have contained misrepresentations, but the defendants, in this case, had a reasonable belief that they could obtain the board of trade’s approval and should not be held accountable for that belief’s eventual failure.