LORD BRAMWELL: —
My Lords, I am of opinion that this
judgment should be reversed. I am glad to come to this conclusion; for, as far
as my judgment goes, it exonerates five men of good character and conduct from a
charge of fraud, which, with all submission, I think wholly unfounded, a charge
supported on such materials as to make all character precarious. I hope this
will not be misunderstood; that promoters of companies will not suppose that
they can safely make inaccurate statements with no responsibility. I should much
regret any such notion; for the general public is so at the mercy of company
promoters, sometimes dishonest, sometimes over sanguine, that it requires all
the protection that the law can give it. Particularly should I regret if it was
supposed that I did not entirely disapprove of the conduct of those directors
who accepted their qualification from the contractor or intended contractor. It
is wonderful to me that honest men of ordinary intelligence cannot see the
impropriety of this. It is obvious that the contractor can only give this
qualification because he means to get it back in the price given for the work he
is to do. That price is to be fixed by the directors who have taken his money.
They are paid by him to give him a good price, as high a price as
they can, while their duty to their shareholders is to give him one as low as
they can.
But there is another thing. The public,
seeing these names, may well say, “These are respectable and intelligent men who
think well enough of this scheme to adventure their money in it; we will do the
same,” little knowing that those thus trusted had made themselves safe against
loss if the thing turned out ill, while they might gain if it was successful. I
am glad to think that Mr. Wilde, a member of my old profession, was not one of
those so bribed. The only shade of doubt I have in the case is, that this safety
from loss in the directors may have made them less careful in judging of the
truth of any statements they have made.
There is another matter I wish to
dispose of before going into the particular facts of the case. I think we need
not trouble ourselves about “legal fraud,” nor whether it is a good or bad
expression; because I hold that actual fraud must be proved in this case to make
the defendants liable, and, as I understand, there is never any occasion to use
the phrase “legal fraud” except when actual fraud cannot be established. “Legal
fraud” is only used when some vague ground of action is to be resorted to, or,
generally speaking, when the person using it will not take the trouble to find,
or cannot find, what duty has been violated or right infringed, but thinks a
claim is somehow made out. With the most sincere respect for Sir J. Hannen I
cannot think the expression “convenient.” I do not think it is “an explanation
which very clearly conveys an idea;” at least, I am certain it does not to my
mind. I think it a mischievous phrase, and one which has contributed to what I
must consider the erroneous decision in this case. But, with these remarks, I
have done with it, and will proceed to consider whether the law is not that
actual fraud must be proved, and whether that has been done.
Now, I really am reluctant to cite
authorities to shew that actual fraud must be established in such a case as
this. It is one of the first things one learned, and one has never heard it
doubted until recently. I am very glad to think that my noble and learned friend
(Lord Herschell) has taken the trouble to go into the authorities fully; but to
some extent I deprecate it, because it seems to me somewhat to come
within the principle Qui s'excuse s'accuse. When a man makes a contract with
another he is bound by it; and, in making it, he is bound not to bring it about
by fraud. Warrantizando vendidit gives a cause of action if the warranty is
broken. Knowingly and fraudulently stating a material untruth which brings
about, wholly or partly, the contract, also gives a cause of action. To this may
now be added the equitable rule (which is not in question here), that a material
misrepresentation, though not fraudulent, may give a right to avoid or rescind a
contract where capable of such rescission. To found an action for damages there
must be a contract and breach, or fraud. The statement of claim in this case
states fraud. Of course that need not be proved merely because it is stated. But
no one ever heard of or saw a statement of claim or declaration for deceit
without it. There is not an authority at common law, or by a common law lawyer,
to the contrary; none has been cited, though there may be some incautious,
hesitating, expressions which point that way. Every case from the earliest in
Comyns' Digest to the present day alleges it. Further, the learned judges of the
Court of Appeal hardly deny it. There is indeed an opinion to the contrary of
the late Master of the Rolls, but it must be remembered that his knowledge of
actions of deceit was small, if any. I did not think, then, that it was
necessary to cite cases to shew that to maintain this action fraud in the
defendant must be shewn, though I am glad it has been done.
Now, as to the evidence. The plaintiff's
case is that the defendants made an untrue statement, which they knew to be
untrue, and likely to influence persons reading it; therefore they were
fraudulent. It is not necessary to consider whether a primâ facie case was made
out by the plaintiff. We have all the evidence before us, and must judge on the
whole. The alleged untrue statement is that, “The company has the right to use
steam or mechanical power instead of horses,” and that a saving would be thereby
effected. Now, this is certainly untrue, because it is stated as an absolute
right, when in truth it was conditional on the approval of the Board of Trade,
and the sanction or consent of two local boards; and a conditional right is not the same as an absolute right. It is
also certain that the defendants knew what the truth was, and therefore knew
that what they said was untrue. But it does not follow that the statement was
fraudulently made. There are various kinds of untruth. There is an absolute
untruth, an untruth in itself, that no addition or qualification can make true;
as, if a man says a thing he saw was black, when it was white, as he remembers
and knows. So, as to knowing the truth. A man may know it, and yet it may not be
present to his mind at the moment of speaking; or, if the fact is present to his
mind, it may not occur to him to be of any use to mention it. For example,
suppose a man was asked whether a writing was necessary in a contract for the
making and purchase of goods, he might well say “Yes,” without adding that
payment on receipt of the goods, or part, would suffice. He might well think
that the question he was asked was whether a contract for goods to be made
required a writing like a contract for goods in existence. If he was writing on
the subject he would, of course, state the exception or qualification.
Now, consider the case here. These
directors naturally trust to their solicitors to prepare their prospectus. It is
prepared and laid before them. They find the statement of their power to use
steam without qualification. It does not occur to them to alter it. They swear
they had no fraudulent intention. At the very last they cannot see the fraud.
There is their oath, their previous character unimpeached, and there is to my
mind this further consideration: the truth would have served their purpose as
well. “We have power to use steam, etc., of course with the usual conditions of
the approval of the Board of Trade and the consent of the local authorities, but
we may make sure of these being granted, as the Board of Trade has already
allowed the power to be inserted in the Act, and the local authorities have
expressed their approbation of the scheme.” (See plaintiff's answer, 313 The references are to the Appendix printed for the House , which shews that he would have been content with that
statement.)
During the argument I said I am not sure
that I should not have passed the prospectus. I will not say so now, because certainly I would not pass it now after
knowing the unfortunate use made of the statement, and no one can tell what
would have been the state of his mind if one of the factors influencing it was
wanting. But I firmly believe it might have been, and was, honestly done by
these defendants. Stirling J. saw and heard them, and was of that opinion. It is
difficult to say that the plaintiff was not. The report of the 6th of November
1884 shewed that the consent of the Board of Trade was necessary, shewed also
that the corporation of Devonport would not consent, shewed therefore the
“untruth” and the defendants' knowledge of it, and yet the plaintiff “had every
confidence in the directors;” and see his answers to questions 53 and 365.
I now proceed to consider the judgments
that have been delivered. It is not necessary to declare my great respect for
those who have delivered them. Stirling J. refuses to say whether actual fraud
must be shewn, and deals with the case on the footing that the question is
whether the defendants had reasonable grounds for making the statement they did.
He holds, as I do, that they thought the company had the right, as put in the
prospectus, to use steam. Then he says he must “come to the conclusion that they
had reasonable grounds for their belief; at all events, that their grounds were
not so unreasonable as to justify me in charging them with being guilty of
fraud.” It is singular that the learned judge seems to consider that
unreasonableness must be proved to such an extent as to shew fraud. He then
proceeds, for what seem to me unanswerable reasons, to shew that they did every
one believe that they had the right stated in the prospectus. He refers to what
he saw of them in the box. He says he cannot come to the conclusion that their
belief was so unreasonable and so unfounded, and their proceedings so reckless
or careless that they ought to be fixed with the consequences of deceit. He
makes an excellent remark, that “mercantile men dealing with matters of business
would be the first to cry out if I extended the notion of deceit into what is
honestly done in the belief that these things would come about, and when they
did not come about, make them liable in an action of fraud.” My only variation
of this would be that it may be that the objection did not, and naturally did
not, occur to them. It has not been argued, and I will say no more
on the question, whether had the plaintiff known the contents of the Act he
would or would not have applied for the shares, than that I agree with Stirling
J.
Cotton L.J. says the law is “that where
a man makes a statement to be acted on by others which is false, and which is
known by him to be false, or is made by him recklessly, or without care whether
it is true or false, that is without any reasonable ground for believing it to
be true,” he is liable to an action for deceit. Well, I agree to all before the
“that is” and I agree to what comes after if it is taken as equivalent to what
goes before, viz., “recklessly or without care whether it is true or false,”
understanding “recklessly” as explained by “without care whether it is true or
false.” For a man who makes a statement without care and regard for its truth or
falsity commits a fraud. He is a rogue. For every man who makes a statement says
“the truth is so and so, and I know it or believe it.” I say I agree to this as
I understand it.
It seems to me, with great respect, that
the learned Lord Justice lost sight of his own definition, and glided into a
different opinion. He says (p. 451, F.), “There is a duty cast upon a director
who makes that statement to take care that there are no statements in it which
in fact are false; to take care that he has reasonable ground for the material
statements which are contained in that document (prospectus), which he intends
to be acted on by others. And although in my opinion it is not necessary there
should be what I should call fraud, there must be a departure from duty, … and
he has violated the right which those who receive the statement have to have
true statements only made to them.” This seems to be a most formidable matter. I
agree there is some such duty. I agree that not only directors in prospectuses,
but all persons in all dealings should tell the truth. If they do not they
furnish evidence of fraud; they subject themselves to have the contract
rescinded. But to say that there is “a right to have true statements only made,”
I cannot agree, and I think it would be much to be regretted if there was any
such right. Mercantile men, as Stirling J. says, would indeed cry out. No
qualification is stated.
If this is law the statement may be
reasonably believed to be true by him who makes it, but if untrue there is to be
a cause of action; and that although he may have refused a warranty. I hope not.
There is a duty to tell the truth, or, rather, what is believed to be the truth.
At page 452, B., his Lordship says: “Where a man makes a false statement without
reasonable ground to suppose it to be true, and without taking care to ascertain
if it is true, he is liable civilly as much as a person who commits what is
usually called fraud.” I say I agree if that means making a statement of which
he knows or believes not the truth. His Lordship proceeds to examine whether the
defendants had reasonable ground for believing what they said, and comes to the
conclusion that they had not, and so holds them liable, not because they were
dishonest, but because they were unreasonable. I say they never undertook to be
otherwise. He says (461 G.): “It is not that I attribute to them any intention
to commit fraud, but they have made a statement without any sufficient reason
for believing it to be true.”
Sir James Hannen says that he agrees
with Cotton L.J.'s statement of the law, and adds: “If a man takes upon himself
to assert a thing to be true, which he does not know to be true, and has no
reasonable ground to believe to be true,” it is sufficient in an action of
deceit. I agree, if he knows he has no such reasonable ground and the knowledge
is present to his mind; otherwise, with great respect, I differ. He cites Lord
Cairns (465 F.), that, “if persons take upon themselves to make assertions as to
which they are ignorant whether they are true or untrue, they must in a civil
point of view be held as responsible as if they had asserted that which they
knew to be untrue.” So say I, but this does not support Sir James's proposition.
Nor does he deal with what he quotes from Lord Cranworth. But further (466), he
speaks of legal fraud as meaning “that degree of moral culpability in the
statement of an untruth to induce another to alter his position, to which the
law attaches responsibility.” But if there is moral culpability, I agree there
is responsibility. But to believe without reasonable grounds is not moral
culpability, but, (if there is such a thing) mental culpability. He says, “the
word ‘fraud’ is in common parlance reserved for actions of great turpitude, but
the law applies it to lesser breaches of
moral duty.” I agree the law applies it to all breaches of the moral duty to
tell the truth in dealing with others; but that duty cannot be honestly broken.
To be actionable, a breach of that duty must be dishonest. Nay, it is a man's
duty sometimes to tell an untruth. For instance, when asked as to a servant's
character, he must say what he believes is the truth, however he may have formed
his opinion, and however wrong it may be. His Lordship says he cannot think the
directors had any reasonable ground for believing the prospectus to be true. But
had they the matter present to their minds? Even if this were the question I
should decide in their favour.
As to the judgment of Lopes L.J., I
quite agree with what he says: “I know of no fraud which will support an action
of deceit to which some moral delinquency does not belong.” I think that shews
the meaning of what he says “fourthly,” though that is made doubtful by what he
says at 472 D.
I think, with all respect, that in all
the judgments there is, I must say it, a confusion of unreasonableness of belief
as evidence of dishonesty, and unreasonableness of belief as of itself a ground
of action.
I have examined these judgments at this
length owing to my sense of their importance and the importance of the question
they deal with. I think it is most undesirable that actions should be
maintainable in respect of statements, made unreasonably perhaps, but honestly.
I think it would be disastrous if there was “a right to have true statements
only made.” This case is an example. I think that in this kind of case, as in
some others, Courts of Equity have made the mistake of disregarding a valuable
general principle in their desire to effect what is, or is thought to be,
justice in a particular instance. It might, perhaps, be well to enact that in
prospectuses of public companies there should be a warranty of the truth of all
statements except where it was expressly said there was no warranty. The
objection is to exceptional legislation, and to the danger of driving
respectable and responsible men from being promoters, and of substituting for
them those who are neither.
In this particular case I hold that
unless fraud in the defendants could be shewn, the action is not maintainable. I
am satisfied there was no fraud. Further, if an unreasonable misstatement
were enough, I hold there was none. Still further, I do not believe that the
plaintiff was influenced by the misstatement, though I am entirely satisfied
that he was an honest witness.
LORD FITZGERALD: —
My Lords, the pleadings and the facts
have been already referred to by the noble Lords who have addressed the House.
The action is for deceit. The writ was sued out in February 1885, and originally
claimed rescission of the contract with the company. It was subsequently amended
by striking out the company as defendants, and also the prayer for rescission,
and it assumed the character of an action for deceit against the present
appellants (five of the directors), and claimed “damages for the fraudulent
misrepresentations of the defendants.”
The statement of claim, which is
sufficient in form to raise the real question, alleged the misrepresentation to
exist in the prospectus issued in February 1883, and to consist of the paragraph
so often read, that the company had a right to use steam or other mechanical
motive power; and it was further alleged “that the defendants intended thereby
to represent that the company had an absolute right to use steam and other
mechanical power,” and that such representation was made fraudulently, and with
the view to induce the plaintiff to take shares in the company.
So far, my Lords, the real issue seems
to have been raised fairly and clearly, and to depend on matters of fact. There
were circumstances connected with the promotion of the company, and the
procuring of four of the defendants to act as directors, which tended to create
suspicion as to their statements and their bona fides, and attracted directly
the attention of the learned judge before whom the case was tried. The
defendants, who were severally produced as witnesses at the trial, were exposed
to a very lengthened and searching cross-examination by counsel for the
plaintiff, and were also carefully examined by the judge as to these
transactions, with the result apparently of freeing them from any imputation
therein of moral misconduct.
The question which I am about to examine
in the first instance, and excluding for the present
the element of fraud, is, whether the impugned statement in the prospectus was a
false statement in the sense of being untrue. That it was inaccurate so far as
it purported to give the legal effect of the special Act I do not doubt, but was
it untrue as representing the position of the company in a popular and business
sense? The General Tramways Act (33 & 34 Vict. c. 78), which regulates
tramways generally, but subject to the provisions of the special Act, if any, of
each company, places them under the supervision of the Board of Trade with a
view to public safety, and for public protection generally, and by its 34th
section it provides “that all carriages used on tramways shall be moved by the
power prescribed by the special Act.”
The special Act of this company became
law on the 24th of July 1882, and by ss. 4 and 5 the company incorporated by the
Act is empowered to make the seven tramways in question in all respects in
accordance with the plans and sections. Sect. 15 provides minutely for their
formation, subject to the orders of the Board of Trade, and by sect. 16 the
tramway is not to be opened for public traffic until it shall have been
inspected and certified by the Board of Trade to be fit for such traffic.
Before referring to the 35th section of
the special Act we may glance at sect. 37 of that Act, which empowers the Board
of Trade to make bye-laws as to any of the tramways on which steam may be used
under the authority of the Act, and sect. 44, which provides that where the
company intends to use steam they shall give two months' notice.
There are several other sections
providing for the use of steam power if the company should elect to use it as
the motor.
In the light of those sections of the
special Act, and of sect. 34 of the general Act, let us now look at the
particular paragraph of the prospectus, and sect. 35 of the special Act. By that
section Parliament has done that which Parliament could do, and which the Board
of Trade could not do. It has conferred on the company authority to use steam as
its motive power. It has not imposed on the company the use of steam power, but
it says that they may use it if they elect to do so. Before dealing with the
consent of the Board of Trade I desire to call attention to the proviso in the 35th section,
“that the exercise of the powers hereby conferred with respect to the use of
steam shall be subject to the regulations in Schedule ‘A,’ and to any
regulations which may be added thereto or substituted therefor by the Board of
Trade for securing to the public all reasonable protection against danger in the
exercise of the powers by this Act conferred with respect to the use of
steam.”
Schedule A., referred to in sect. 35,
contains no less than ten regulations for the direction of the company in the
exercise of the right so conferred to use steam power.
Now, turning back to the words “with the
consent of the Board of Trade,” in sect 35 of the special Act, that consent
could not confer, nor would its absence take away, the right conferred by the
legislature to use steam as a motor. Its true character is that of a precaution
imposed by the legislature to defer the actual exercise of the right conferred
until the supervision of the Board of Trade secures to the public all reasonable
protections against danger. To attain these objects the legislature provides
that the powers it has conferred should not be actually exercised without the
consent of the Board of Trade.
My Lords, I have, though with
difficulty, arrived at the conclusion that the statement in the prospectus, that
by the special Act the company had the right to use steam power, was not untrue
in a popular or business sense.
Let us see for a moment in what way and
with what meaning General Hutchinson used similar expressions. In his report of
the 12th of July 1884 he says: “The Act of 1882 gives, however, the company
authority to use mechanical power over all their system, and I think it would be
most objectionable that this power should be exercised on parts of Tramway No. 1
on account of the narrowness of three of the roads.”
The remainder of the incriminated
paragraph of the prospectus is, “and it is fully expected that by means of this
(i.e., the use of steam) a considerable saving will result in the working
expenses of the line as compared with other tramways worked by horses.” This was
not untrue: there had been a division of opinion in the directory on the
subject, which was finally and before the issue of the prospectus resolved in
favour of steam.
The conclusion I have arrived at, my
Lords, is that this paragraph of the prospectus, though inaccurate in point of
law in one particular, seems on the whole to have been morally true.
If this view is correct it is an answer
to the action, but assuming that it is not correct, or that your Lordships are
not prepared to adopt it, I proceed to express my opinion on the remaining
substance of the action. Cotton L.J. describes the action as “an action of
deceit, a mere common law action.” The description is accurate, and I proceed to
deal with it as a mere common law action. It has not been in the least altered
in its characteristics by having been instituted in the Chancery Division, or
tried by a judge without the aid of a jury, nor are your Lordships necessarily
driven to consider on the present appeal some of the subtle and refined
distinctions which have been engrafted on the clear and simple principles of the
common law. The action for deceit at common law is founded on fraud. It is
essential to the action that moral fraud should be established, and since the
case of Collins v. Evans 5 QB 804, 820 , in the Exchequer Chamber, it has never been doubted that fraud must
concur with the false statement to maintain the action. It would not be
sufficient to shew that a false representation had been made. It must further be
established that the defendant knew at the time of making it that the
representation was untrue, or, to adopt the language of the learned editors of
the Leading Cases, that “the defendant must be shewn to have been actually and
fraudulently cognisant of the falsehood of his representation or to have made it
fraudulently without belief that it was true.” The leading counsel for the
respondent met the argument fairly on the allegations of fact. He alleged “that
the defendants were not honest; that they stated in the prospectus a definite
lie, and knew that it was a lie.” That is the very issue, in fact, in the
case.
The whole law and all the cases on the
subject will be found in the notes to Chandelor v. Lopus 1 Smith's LC 9th (Ed) p 186 and Pasley v. Freeman 2 Smith's LC 9th (Ed) p 74 . There is also a clear and able summary of the decisions, both in law
and in equity, brought down to the present time in the recent edition of
Benjamin on Sales, by Pearson-Gee and Boyd.
I desire to make an observation on
Chandelor v. Lopus 1 Smith's LC 9th (Ed) p 186 . The report in Cro. Jac. 4 would seem to have but little direct
bearing on the present case were it not for the opinion attributed to Anderson
J.; but there is a valuable note in 1 Dyer by Vaillant (75a) which is as
follows: Lopus brought an action upon the case against Chandelor, and shewed
that, whereas the defendant was a goldsmith, and skilled in the nature of
precious stones, and being possessed of a stone which the defendant asserted and
assured the said plaintiff to be a true and perfect stone called a bezoar stone
&c., upon which the plaintiff bought it &c. There the opinion of Popham
C.J. was “that if I have any commodities which are damaged (whether victuals or
otherwise), and I, knowing them to be so, sell them for
good, and affirm them to be so, an action upon the case lies for the deceit: but
although they be damaged, if I, knowing not that, affirm
them to be good, still no action lies, without I warrant them to be good.” The
action seems originally to have been on a warranty which failed in fact, as
there had been no warranty, and it was then sought to support it as an action
for deceit; but it was not alleged in the count that the defendant knew the
representation to be untrue. It was in reference to that that the observation of
Popham C.J. was made. He had the reputation of being a consummate lawyer.
The note in 1 Dyer (75a) was probably by
Mr. Treby, afterwards Chief Justice Treby. He edited an edition of Dyer
published in 1688. I have not had an opportunity of referring to it, but it is
said that he gave the public some highly authoritative notes in that edition. I
have quoted from Mr. Vaillant's edition, published in 1794.
The whole evidence given on this appeal
has been laid before your Lordships, and we have to deal with it as a whole.
That evidence has been already so fully stated and criticised that it is not
necessary for me to do more than to state the conclusions of fact which in my
opinion are reasonably to be deduced from it, viz. that the several defendants
did not know that the incriminated statement in the prospectus was untrue, and
that, on the contrary, they severally and in good faith believed it to be true. The conclusions, in fact, at which
I have arrived, render it unnecessary for me to consider the long and rather
bewildering list of authorities to which your Lordships were referred, or to
criticise the reasons given in the Court of Appeal for their decision in the
present case. I desire, however, to make a single observation.
There is one characteristic which, as it
seems to me, pervades each of the several judgments in the Court of Appeal, viz.
that the bonâ fide belief of the defendants in the truth of the representation
was unavailing unless it was a reasonable belief resting on reasonable grounds.
If this is correct, it seems to me that in an action for “deceit” it would be
necessary to submit to the jury (if tried before that tribunal) not only the
existence of that belief bonâ fide, but also the grounds on which it was arrived
at, and their reasonableness.
I am by no means satisfied that such is
the law, and if now driven to express an opinion on it, I would prefer following
the opinion of Lord Cranworth in Western Bank of Scotland v. Addie Law Rep 1 HL, Sc 145, 168 , in which he said: “I confess that my opinion was that in what his
Lordship (the Lord President) thus stated, he went beyond what principle
warrants. If persons in the situation of directors of a bank make statements as
to the condition of its affairs, which they bonâ fide believe to be true, I
cannot think they can be guilty of fraud, because other persons think, or the
Court thinks, or your Lordships think, that there was no sufficient ground to
warrant the opinion which they had formed. If a little more care and caution
must have led the directors to a conclusion different from that which they put
forth, this may afford strong evidence to shew that they did not really believe
in the truth of what they stated, and so that they were guilty of fraud. But
this would be the consequence, not of their having stated as true what they had
not reasonable ground to believe to be true, but of their having stated as true
what they did not believe to be true.”
A director is bound in all particulars
to be careful and circumspect, and not, either in his statements to the public
or in the performance of the duties he has undertaken, to be careless or negligent, or rash. Want of care or circumspection, as well as
recklessness, may in such a case as the present be taken into consideration in
determining at every stage the question of bona fides.
My Lords, I am of opinion that the
decision of the Court of Appeal should be reversed.
LORD HERSCHELL: —
My Lords, in the statement of claim in
this action the respondent, who is the plaintiff, alleges that the appellants
made in a prospectus issued by them certain statements which were untrue, that
they well knew that the facts were not as stated in the prospectus, and made the
representations fraudulently, and with the view to induce the plaintiff to take
shares in the company.
“This action is one which is commonly
called an action of deceit, a mere common law action.” This is the description
of it given by Cotton L.J. in delivering judgment. I think it important that it
should be borne in mind that such an action differs essentially from one brought
to obtain rescission of a contract on the ground of misrepresentation of a
material fact. The principles which govern the two actions differ widely. Where
rescission is claimed it is only necessary to prove that there was
misrepresentation; then, however honestly it may have been made, however free
from blame the person who made it, the contract, having been obtained by
misrepresentation, cannot stand. In an action of deceit, on the contrary, it is
not enough to establish misrepresentation alone; it is conceded on all hands
that something more must be proved to cast liability upon the defendant, though
it has been a matter of controversy what additional elements are requisite. I
lay stress upon this because observations made by learned judges in actions for
rescission have been cited and much relied upon at the bar by counsel for the
respondent. Care must obviously be observed in applying the language used in
relation to such actions to an action of deceit. Even if the scope of the
language used extend beyond the particular action which was being dealt with, it
must be remembered that the learned judges were not engaged in determining what is necessary to support an action
of deceit, or in discriminating with nicety the elements which enter into
it.
There is another class of actions which
I must refer to also for the purpose of putting it aside. I mean those cases
where a person within whose special province it lay to know a particular fact,
has given an erroneous answer to an inquiry made with regard to it by a person
desirous of ascertaining the fact for the purpose of determining his course
accordingly, and has been held bound to make good the assurance he has given.
Burrowes v. Lock 10 Ves 470 may be cited as an example, where a trustee had been asked by an
intended lender, upon the security of a trust fund, whether notice of any prior
incumbrance upon the fund had been given to him. In cases like this it has been
said that the circumstance that the answer was honestly made in the belief that
it was true affords no defence to the action. Lord Selborne pointed out in
Brownlie v. Campbell 5 App Cas at p 935 that these cases were in an altogether different category from actions
to recover damages for false representation, such as we are now dealing
with.
One other observation I have to make
before proceeding to consider the law which has been laid down by the learned
judges in the Court of Appeal in the case before your Lordships. “An action of
deceit is a common law action, and must be decided on the same principles,
whether it be brought in the Chancery Division or any of the Common Law
Divisions, there being, in my opinion, no such thing as an equitable action for
deceit.” This was the language of Cotton L.J. in Arkwright v. Newbould 17 Ch D 320 . It was adopted by Lord Blackburn in Smith v. Chadwick 9 App Cas 193 , and is not, I think, open to dispute.
In the Court below Cotton L.J. said:
“What in my opinion is a correct statement of the law is this, that where a man
makes a statement to be acted upon by others which is false, and which is known
by him to be false, or is made by him recklessly, or without care whether it is
true or false, that is, without any reasonable ground for believing it to be
true, he is liable in an action of deceit at the suit of anyone to whom it was
addressed or anyone of the class to whom it was addressed and who was materially induced by the misstatement
to do an act to his prejudice.” About much that is here stated there cannot, I
think, be two opinions. But when the learned Lord Justice speaks of a statement
made recklessly or without care whether it is true or false, that
is without any reasonable ground for believing it to be true, I find
myself, with all respect, unable to agree that these are convertible
expressions. To make a statement careless whether it be true or false, and
therefore without any real belief in its truth, appears to me to be an
essentially different thing from making, through want of care, a false
statement, which is nevertheless honestly believed to be true. And it is surely
conceivable that a man may believe that what he states is the fact, though he
has been so wanting in care that the Court may think that there were no
sufficient grounds to warrant his belief. I shall have to consider hereafter
whether the want of reasonable ground for believing the statement made is
sufficient to support an action of deceit. I am only concerned for the moment to
point out that it does not follow that it is so, because there is authority for
saying that a statement made recklessly, without caring whether it be true or
false, affords sufficient foundation for such an action.
That the learned Lord Justice thought
that if a false statement were made without reasonable ground for believing it
to be true an action of deceit would lie, is clear from a subsequent passage in
his judgment. He says that when statements are made in a prospectus like the
present, to be circulated amongst persons in order to induce them to take
shares, “there is a duty cast upon the director or other person who makes those
statements to take care that there are no expressions in them which in fact are
false; to take care that he has reasonable ground for the material statements
which are contained in that document which he prepares and circulates for the
very purpose of its being acted upon by others.”
The learned judge proceeds to say:
“Although in my opinion it is not necessary that there should be what I should
call fraud, yet in these actions, according to my view of the law, there must be
a departure from duty, that is to say, an untrue statement made without any
reasonable ground for believing that statement to be true; and in my opinion when a man
makes an untrue statement with an intention that it shall be acted upon without
any reasonable ground for believing that statement to be true he makes a default
in a duty which was thrown upon him from the position he has taken upon himself,
and he violates the right which those to whom he makes the statement have to
have true statements only made to them.”
Now I have first to remark on these
observations that the alleged “right” must surely be here stated too widely, if
it is intended to refer to a legal right, the violation of which may give rise
to an action for damages. For if there be a right to have true statements only
made, this will render liable to an action those who make untrue statements,
however innocently. This cannot have been meant. I think it must have been
intended to make the statement of the right correspond with that of the alleged
duty, the departure from which is said to be making an untrue statement without
any reasonable ground for believing it to be true. I have further to observe
that the Lord Justice distinctly says that if there be such a departure from
duty an action of deceit can be maintained, though there be not what he should
call fraud. I shall have by-and-by to consider the discussions which have arisen
as to the difference between the popular understanding of the word “fraud” and
the interpretation given to it by lawyers, which have led to the use of such
expressions as “legal fraud,” or “fraud in law;” but I may state at once that,
in my opinion, without proof of fraud no action of deceit is maintainable. When
I examine the cases which have been decided upon this branch of the law, I shall
endeavour to shew that there is abundant authority to warrant this
proposition.
I return now to the judgments delivered
in the Court of Appeal. Sir James Hannen says: “I take the law to be that if a
man takes upon himself to assert a thing to be true which he does not know to be
true, and has no reasonable ground to believe to be true, in order to induce
another to act upon the assertion, who does so act and is thereby damnified, the
person so damnified is entitled to maintain an action for deceit.” Again, Lopes
L.J. states what, in his opinion, is the result of the cases. I will not trouble your Lordships
with quoting the first three propositions which he lays down, although I do not
feel sure that the third is distinct from, and not rather an instance of, the
case dealt with by the second proposition. But he says that a person making a
false statement, intended to be and in fact relied on by the person to whom it
is made, may be sued by the person damaged thereby: “Fourthly, if it is untrue
in fact, but believed to be true, but without any reasonable grounds for such
belief.”
It will thus be seen that all the
learned judges concurred in thinking that it was sufficient to prove that the
representations made were not in accordance with fact, and that the person
making them had no reasonable ground for believing them. They did not treat the
absence of such reasonable ground as evidence merely that the statements were
made recklessly, careless whether they were true or false, and without belief
that they were true, but they adopted as the test of liability, not the
existence of belief in the truth of the assertions made, but whether the belief
in them was founded upon any reasonable grounds. It will be seen, further, that
the Court did not purport to be establishing any new doctrine. They deemed that
they were only following the cases already decided, and that the proposition
which they concurred in laying down was established by prior authorities.
Indeed, Lopes L.J. expressly states the law in this respect to be well settled.
This renders a close and critical examination of the earlier authorities
necessary.
I need go no further back than the
leading case of Pasley v. Freeman 2 Smith's LC 74 . If it was not there for the first time held that an action of deceit
would lie in respect of fraudulent representations against a person not a party
to a contract induced by them, the law was at all events not so well settled but
that a distinguished Judge, Grose J., differing from his brethren on the Bench,
held that such an action was not maintainable. Buller J., who held that the
action lay, adopted in relation to it the language of Croke J., in 3 Bulstrode
95, who said: “Fraud without damage, or damage without fraud, gives no cause of
action, but where these two concur an action lies.” In reviewing the case of Crosse v. Gardner Carth 90 he says: “Knowledge of the falsehood of the thing asserted is fraud and
deceit;” and further, after pointing out that in Risney v. Selby 1 Salk 211 the judgment proceeded wholly on the ground that the defendant knew
what he asserted to be false, he adds: “The assertion alone will not maintain
the action, but the plaintiff must go on to prove that it was false, and that the defendant knew it to be so,” the latter words being
specially emphasised. Kenyon C.J. said: “The plaintiffs applied to the
defendant, telling him that they were going to deal with Falch, and desired to
be informed of his credit, when the defendant fraudulently, and knowing it to be
otherwise, and with a design to deceive the plaintiffs, made the false
affirmation stated on the record, by which they sustained damage. Can a doubt be
entertained for a moment but that this is injurious to the plaintiffs?” In this
case it was evidently considered that fraud was the basis of the action, and
that such fraud might consist in making a statement known to be false.
Haycraft v. Creasy 2 East, 92 was again an action in respect of a false affirmation made by the
defendant to the plaintiff about the credit of a third party whom the plaintiff
was about to trust. The words complained of were, “I can assure you of my own
knowledge that you may credit Miss R. to any amount with perfect safety.” All
the judges were agreed that fraud was of the essence of the action, but they
differed in their view of the conclusion to be drawn from the facts. Lord Kenyon
thought that fraud had been proved, because the defendant stated that to be true
within his own knowledge which he did not know to be true. The other judges
thinking that the defendant's words vouching his own knowledge were no more than
a strong expression of opinion, inasmuch as a statement concerning the credit of
another can be no more than a matter of opinion, and that he did believe the
lady's credit to be what he represented, held that the action would not lie. It
is beside the present purpose to inquire which view of the facts was the more
sound. Upon the law there was no difference of opinion. It is a distinct
decision that knowledge of the falsity of the affirmation made is essential to
the maintenance of the action, and that
belief in its truth affords a defence.
I may pass now to Foster v. Charles 7 Bing 105 . It was there contended that the defendant was not liable, even though
the representation he had made was false to his knowledge, because he had no
intention of defrauding or injuring the plaintiff. This contention was not
upheld by the Court, Tindal C.J. saying: “It is fraud in law if a party makes
representations which he knows to be false, and injury ensues, although the
motives from which the representations proceeded may not have been bad.” This is
the first of the cases in which I have met with the expression “fraud in law.”
It was manifestly used in relation to the argument that the defendant was not
actuated by a desire to defraud or injure the person to whom the representation
was made. The popular use of the word “fraud” perhaps involves generally the
conception of such a motive as one of its elements. But I do not think the Chief
Justice intended to indicate any doubt that the act which he characterised as a
fraud in law was in truth fraudulent as a matter of fact also. Wilfully to tell
a falsehood, intending that another shall be led to act upon it as if it were
the truth, may well be termed fraudulent, whatever the motive which induces it,
though it be neither gain to the person making the assertion nor injury to the
person to whom it is made.
Foster v. Charles 7 Bing 105 was followed in Corbett v. Brown 8 Bing 33 , and shortly afterwards in Polhill v. Walter 3 B & Ad 114 . The learned counsel for the respondent placed great reliance on this
case, because although the jury had negatived the existence of fraud in fact the
defendant was nevertheless held liable. It is plain, however, that all that was
meant by this finding of the jury was, that the defendant was not actuated by
any corrupt or improper motive, for Lord Tenterden says, “It was contended that
… in order to maintain this species of action it is not necessary to prove that
the false representation was made from a corrupt motive of gain to the defendant
or a wicked motive of injury to the plaintiff; it was said to be enough if a
representation is made which the party making it knows to be untrue, and which
is intended by him, or which from the mode in which it is made is calculated, to
induce another to act on the faith of it in such a way as that he may incur
damage, and that damage is actually incurred. A wilful falsehood of such a
nature was contended to be in the legal sense of the word a
fraud, and for this position was cited Foster v. Charles 7 Bing 105 , to which may be added the recent case of Corbett v. Brown 8 Bing 33 . The principle of these cases appears to us to be well founded, and to
apply to the present.”
In a later case of Crawshay v.
Thompson 4 M & Gr 357 Maule J. explains Polhill v. Walter 3 B & Ad 114 thus: “If a wrong be done by a false representation of a party who
knows such representation to be false, the law will infer an intention to
injure. That is the effect of Polhill v. Walter” 3 B & Ad 114 . In the same case, Cresswell J. defines “fraud in law,” in terms which
have been often quoted. “The cases,” he says, “may be considered to establish
the principle that fraud in law consists in knowingly asserting that which is
false in fact to the injury of another.”
In Moens v. Heyworth 10 M & W at p 157 , which was decided in the same year as Crawshay v. Thompson 4 M & Gr 357 , Lord Abinger having suggested that an action of fraud might be
maintained where no moral blame was to be imputed, Parke B. said: “To support
that count (viz., a count for fraudulent representation) it was essential to
prove that the defendants knowingly” (and I observe that
this word is emphasised), “by words or acts, made such a representation as is
stated in the third count, relative to the invoice of these goods, as they knew
to be untrue.”
The next case in the series, Taylor v.
Ashton 11 M & W 401 , is one which strikes me as being of great importance. It was an
action brought against directors of a bank for fraudulent representations as to
its affairs, whereby the plaintiff was induced to take shares. The jury found
the defendants not guilty of fraud, but expressed the opinion that they had been
guilty of gross negligence. Exception was taken to the mode in which the case
was left to the jury, and it was contended that their verdict was sufficient to render the defendants liable; Parke
B., however, in delivering the opinion of the Court said: “It is insisted that
even that (viz., the gross negligence which the jury had found), accompanied
with a damage to the plaintiff in consequence of that gross negligence, would be
sufficient to give him a right of action. From this proposition we entirely
dissent, because we are of opinion that, independently of any contract between
the parties, no one can be made responsible for a representation of this kind
unless it be fraudulently made …. But then it was said that
in order to constitute that fraud, it was not necessary to shew that the
defendants knew the fact they stated to be untrue, that it
was enough that the fact was untrue if they communicated
that fact for a deceitful purpose, and to that proposition the Court is prepared
to assent. It is not necessary to shew that the defendants knew the facts to be
untrue; if they stated a fact which was untrue for a fraudulent purpose, they at
the same time not believing that fact to be true, in that
case it would be both a legal and moral fraud.”
Now it is impossible to conceive a more
emphatic declaration than this, that to support an action of deceit fraud must
be proved, and that nothing less than fraud will do. I can find no trace of the
idea that it would suffice if it were shewn that the defendants had not
reasonable grounds for believing the statements they made. It is difficult to
understand how the defendants could, in the case on which I am commenting, have
been guilty of gross negligence in making the statements they did, if they had
reasonable grounds for believing them to be true, or if they had taken care that
they had reasonable grounds for making them.
All the cases I have hitherto referred
to were in courts of first instance. But in Collins v. Evans 5 QB 804, 820 they were reviewed by the Exchequer Chamber. The judgment of the Court
was delivered by Tindal C.J. After stating the question at issue to be “whether
a statement or representation which is false in fact, but not known to be so by
the party making it, but, on the contrary, made honestly and in the full belief
that it is true, affords a ground of action,” he proceeds to say: “The current
of the authorities, from Pasley v.
Freeman 2 Smith's LC 74 downwards, has laid down the general rule of law to be, that fraud must
concur with the false statement in order to give a ground of action.” Is it not
clear that the Court considered that fraud was absent if the statement was “made
honestly, and in the full belief that it was true”?
In Evans v. Edmonds 13 CB 777 Maule J. expressed an important opinion, often quoted, which has been
thought to carry the law further than the previous authorities, though I do not
think it really does so. He said: “If a man having no knowledge whatever on the
subject takes upon himself to represent a certain state of facts to exist he
does so at his peril, and if it be done either with a view to secure some
benefit to himself or to deceive a third person he is in law guilty of a fraud,
for he takes upon himself to warrant his own belief of the truth of that which
he so asserts. Although the person making the representation may have no
knowledge of its falsehood the representation may still have been fraudulently
made.” The foundation of this proposition manifestly is, that a person making
any statement which he intends another to act upon must be taken to warrant his
belief in its truth. Any person making such a statement must always be aware
that the person to whom it is made will understand, if not that he who makes it
knows, yet at least that he believes
it to be true. And if he has no such belief he is as much guilty of fraud as if
he had made any other representation which he knew to be false, or did not
believe to be true.
I now arrive at the earliest case in
which I find the suggestion that an untrue statement made without reasonable
ground for believing it will support an action for deceit. In Western Bank of
Scotland v. Addie Law Rep 1 HL, Sc 145, 162 the Lord President told the jury “that if a case should occur of
directors taking upon themselves to put forth in their report statements of
importance in regard to the affairs of the bank false in themselves and which
they did not believe, or had no reasonable ground to believe to be true, that
would be a misrepresentation and deceit.” Exception having been taken to this
direction without avail in the Court of Session, Lord Chelmsford in this House
said: “I agree in the propriety of this interlocutor. In the argument upon this
exception the case was put of an honest belief being entertained by the
directors, of the reasonableness of which it was said the jury, upon this
direction, would have to judge. But supposing a person makes an untrue statement
which he asserts to be the result of a bonâ fide belief in its truth, how can
the bona fides be tested except by considering the grounds of such belief? And
if an untrue statement is made founded upon a belief which is destitute of all
reasonable grounds, or which the least inquiry would immediately correct, I do
not see that it is not fairly and correctly characterised as misrepresentation
and deceit.”
I think there is here some confusion
between that which is evidence of fraud, and that which constitutes it. A
consideration of the grounds of belief is no doubt an important aid in
ascertaining whether the belief was really entertained. A man's mere assertion
that he believed the statement he made to be true is not accepted as conclusive
proof that he did so. There may be such an absence of reasonable ground for his
belief as, in spite of his assertion, to carry conviction to the mind that he
had not really the belief which he alleges. If the learned Lord intended to go
further, as apparently he did, and to say that though the belief was really
entertained, yet if there were no reasonable grounds for it, the person making
the statement was guilty of fraud in the same way as if he had known what he
stated to be false, I say, with all respect, that the previous authorities
afford no warrant for the view that an action of deceit would lie under such
circumstances. A man who forms his belief carelessly, or is unreasonably
credulous, may be blameworthy when he makes a representation on which another is
to act, but he is not, in my opinion, fraudulent in the sense in which that word
was used in all the cases from Pasley v. Freeman 2 Smith's LC 74 down to that with which I am now dealing. Even when the expression
“fraud in law” has been employed, there has always been present, and regarded as
an essential element, that the deception was wilful either because the untrue
statement was known to be untrue, or because belief in it was asserted without
such belief existing.
I have made these remarks with the more
confidence because they appear to me to have the high sanction of Lord
Cranworth. In delivering his opinion in the same case he said: “I confess that
my opinion was that in what his Lordship (the Lord President) thus stated, he
went beyond what principle warrants. If persons in the situation of directors of
a bank make statements as to the condition of its affairs which they bonâ fide
believe to be true, I cannot think they can be guilty of fraud because other
persons think, or the Court thinks, or your Lordships think, that there was no
sufficient ground to warrant the opinion which they had formed. If a little more
care and caution must have led the directors to a conclusion different from that
which they put forth, this may afford strong evidence to shew that they did not
really believe in the truth of what they stated, and so that they were guilty of
fraud. But this would be the consequence not of their having stated as true what
they had not reasonable ground to believe to be true, but of their having stated
as true what they did not believe to be true.”
Sir James Hannen, in his judgment below,
seeks to limit the application of what Lord Cranworth says to cases where the
statement made is a matter of opinion only. With all deference I do not think it
was intended to be or can be so limited. The direction which he was considering,
and which he thought went beyond what true principle warranted, had relation to
making false statements of importance in regard to the affairs of the bank. When
this is borne in mind, and the words which follow those quoted by Sir James
Hannen are looked at, it becomes to my mind obvious that Lord Cranworth did not
use the words “the opinion which they had formed” as meaning anything different
from “the belief which they entertained.”
The opinions expressed by Lord Cairns in
two well-known cases have been cited as though they supported the view that an
action of deceit might be maintained without any fraud on the part of the person
sued. I do not think they bear any such construction. In the case of Reese
Silver Mining Co. v. Smith Law Rep
4 HL 64, 79 he said: “If persons take upon themselves to make assertions as to
which they are ignorant whether they are true or untrue they must, in a civil point of view, be
held as responsible as if they had asserted that which they knew to be untrue.”
This must mean that the persons referred to were conscious when making the
assertion that they were ignorant whether it was true or untrue. For if not it
might be said of any one who innocently makes a false statement. He must be
ignorant that it is untrue, for otherwise he would not make it innocently; he
must be ignorant that it is true, for by the hypothesis it is false. Construing
the language of Lord Cairns in the sense I have indicated, it is no more than an
adoption of the opinion expressed by Maule J. in Evans v. Edmonds 13 CB 777 . It is a case of the representation of a person's belief in a fact
when he is conscious that he knows not whether it be true or false, and when he
has therefore no such belief. When Lord Cairns speaks of it as not being fraud
in the more invidious sense, he refers, I think, only to the fact that there was
no intention to cheat or injure.
In Peek v. Gurney Law Rep
6 HL 377, 409 the same learned Lord, after alluding to the circumstance that the
defendants had been acquitted of fraud upon a criminal charge, and that there
was a great deal to shew that they were labouring under the impression that the
concern had in it the elements of a profitable commercial undertaking, proceeds
to say: “They may be absolved from any charge of a wilful design or motive to
mislead or defraud the public. But in a civil proceeding of this kind all that
your Lordships have to examine is the question, was there, or was there not,
misrepresentation in point of fact? If there was, however innocent the motive
may have been, your Lordships will be obliged to arrive at the consequences
which properly would result from what was done.” In the case then under
consideration it was clear that if there had been a false statement of fact it
had been knowingly made. Lord Cairns certainly could not have meant that in an
action of deceit the only question to be considered was whether or not there was
misrepresentation in point of fact. All that he there pointed out was that in
such a case motive was immaterial: that it mattered not that there was no design
to mislead or defraud the public if a false representation were knowingly made.
It was therefore but an affirmation of the law laid down in Foster v. Charles 7 Bing 105 , Polhill v. Walter 3 B & Ad 114 , and other cases I have already referred to.
I come now to very recent cases. In Weir
v. Bell 3 Ex D 238 Lord Bramwell vigorously criticised the expression “legal fraud,” and
indicated a very decided opinion that an action founded on fraud could not be
sustained except by the proof of fraud in fact. I have already given my reasons
for thinking that, until recent times at all events, the judges who spoke of
fraud in law did not mean to exclude the existence of fraud in fact, but only of
an intention to defraud or injure.
In the same case Cotton L.J. stated the
law in much the same way as be did in the present case, treating “recklessly” as
equivalent to “without any reasonable ground for believing” the statements made.
But the same learned judge in Arkwright v. Newbold
17 Ch D 301 laid down the law somewhat differently, for he said: “In an action of
deceit the representation to found the action must not be innocent, that is to
say, it must be made either with knowledge of its being false, or with a
reckless disregard as to whether it is or is not true.” And his exposition of
the law was substantially the same in Edgington v. Fitzmaurice
29 Ch D 459 In this latter case Bowen L.J. defined what the plaintiff must prove
in addition to the falsity of the statement, as “secondly, that it was false to
the knowledge of the defendants, or that they made it not caring whether it was
true or false.”
It only remains to notice the case of
Smith v. Chadwick
20 Ch D 27, 44, 67 . The late Master of the Rolls there said, “A man may issue a
prospectus or make any other statement to induce another to enter into a
contract, believing that his statement is true, and not intending to deceive;
but he may through carelessness have made statements which are not true, and
which he ought to have known were not true, and if he does so he is liable in an
action for deceit; he cannot be allowed to escape merely because he had good
intentions, and did not intend to defraud.” This, like everything else that fell
from that learned judge, is worthy of respectful consideration. With the last
sentence I quite agree, but I cannot assent to the doctrine that
a false statement made through carelessness, and which ought to have been known
to be untrue, of itself renders the person who makes it liable to an action for
deceit. This does not seem to me by any means necessarily to amount to fraud,
without which the action will not, in my opinion, lie.
It must be remembered that it was not
requisite for Sir George Jessel in Smith v. Chadwick
20 Ch D 27, 44, 67 to form an opinion whether a statement carelessly made, but honestly
believed, could be the foundation of an action of deceit. The decision did not
turn on any such point. The conclusion at which he arrived is expressed in these
terms: “On the whole I have come to the conclusion that this, although in some
respects inaccurate, and in some respects not altogether free from imputation of
carelessness, was a fair, honest, and bonâ fide statement on the part of the
defendants, and by no means exposes them to an action for deceit.”
I may further note that in the same
case, Lindley L.J. said: “The plaintiff has to prove, first, that the
misrepresentation was made to him; secondly, he must prove that it was false;
thirdly, that it was false to the knowledge of the defendants, or at all events
that they did not believe the truth of it.” This appears to be a different
statement of the law to that which I have just criticised, and one much more in
accord with the prior decisions.
The case of Smith v. Chadwick was
carried to your Lordships' House 9 App Cas 187, 190 . Lord Selborne thus laid down the law: “I conceive that in an action
of deceit it is the duty of the plaintiff to establish two things: first, actual
fraud, which is to be judged of by the nature and character of the
representations made, considered with reference to the object for which they
were made, the knowledge or means of knowledge of the person making them, and
the intention which the law justly imputes to every man to produce those
consequences which are the natural result of his acts; and secondly, he must
establish that this fraud was an inducing cause to the contract.” It will be
noticed that the noble and learned Lord regards the proof of actual fraud as
essential, all the other matters to which he refers are elements to be
considered in determining whether such fraud has been established. Lord Blackburn indicated
that although he nearly agreed with the Master of the Rolls, that learned judge
had not quite stated what he conceived to be the law. He did not point out
precisely how far he differed, but it is impossible to read his judgment in this
case, or in that of Brownlie v. Campbell 5 App Cas 925 without seeing that in his opinion proof of actual fraud or of a wilful
deception was requisite.
Having now drawn attention, I believe,
to all the cases having a material bearing upon the question under
consideration, I proceed to state briefly the conclusions to which I have been
led. I think the authorities establish the following propositions: First, in
order to sustain an action of deceit, there must be proof of fraud, and nothing
short of that will suffice. Secondly, fraud is proved when it is shewn 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. And this probably covers the whole ground, for one who knowingly
alleges that which is false, has obviously no such honest belief. Thirdly, if
fraud be proved, the motive of the person guilty of it is immaterial. It matters
not that there was no intention to cheat or injure the person to whom the
statement was made.
I think these propositions embrace all
that can be supported by decided cases from the time of Pasley v. Freeman 2 Smith's LC 74 down to Western Bank of Scotland v. Addie Law Rep 1 HL, Sc 145 in 1867, when the first suggestion is to be found that belief in the
truth of what he has stated will not suffice to absolve the defendant if his
belief be based on no reasonable grounds. I have shewn that this view was at
once dissented from by Lord Cranworth, so that there was at the outset as much
authority against it as for it. And I have met with no further assertion of Lord
Chelmsford's view until the case of Weir v. Bell 3 Ex D 238 , where it seems to be involved in Lord Justice Cotton's enunciation of
the law of deceit. But no reason is there given in support of the view, it is
treated as established law. The dictum of the late Master of the Rolls, that a
false statement made through carelessness, which the person making it ought to
have known to be untrue, would sustain an action of deceit, carried the matter
still further. But that such an action could be maintained notwithstanding an
honest belief that the statement made was true, if there were no reasonable
grounds for the belief, was, I think, for the first time decided in the case now
under appeal.
In my opinion making a false statement
through want of care falls far short of, and is a very different thing from,
fraud, and the same may be said of a false representation honestly believed
though on insufficient grounds. Indeed Cotton L.J. himself indicated, in the
words I have already quoted, that he should not call it fraud. But the whole
current of authorities, with which I have so long detained your Lordships, shews
to my mind conclusively that fraud is essential to found an action of deceit,
and that it cannot be maintained where the acts proved cannot properly be so
termed. And the case of Taylor v. Ashton 11 M & W 401 appears to me to be in direct conflict with the dictum of Sir George
Jessel, and inconsistent with the view taken by the learned judges in the Court
below. I observe that Sir Frederick Pollock, in his able work on Torts (p. 243,
note), referring, I presume, to the dicta of Cotton L.J. and Sir George Jessel
M.R., says that the actual decision in Taylor v. Ashton 11 M & W 401 is not consistent with the modern cases on the duty of directors of
companies. I think he is right. But for the reasons I have given I am unable to
hold that anything less than fraud will render directors or any other persons
liable to an action of deceit.
At the same time I desire to say
distinctly that when a false statement has been made the questions whether there
were reasonable grounds for believing it, and what were the means of knowledge
in the possession of the person making it, are most weighty matters for
consideration. The ground upon which an alleged belief was founded is a most
important test of its reality. I can conceive many cases where the fact that an
alleged belief was destitute of all reasonable foundation
would suffice of itself to convince the Court that it was not really
entertained, and that the representation was a fraudulent one. So, too, although
means of knowledge are, as was pointed out by Lord Blackburn in Brownlie v.
Campbell 5 App Cas at p 952 , a very different thing from knowledge, if I thought that a person
making a false statement had shut his eyes to the facts, or purposely abstained
from inquiring into them, I should hold that honest belief was absent, and that
he was just as fraudulent as if he had knowingly stated that which was
false.
I have arrived with some reluctance at
the conclusion to which I have felt myself compelled, for I think those who put
before the public a prospectus to induce them to embark their money in a
commercial enterprise ought to be vigilant to see that it contains such
representations only as are in strict accordance with fact, and I should be very
unwilling to give any countenance to the contrary idea. I think there is much to
be said for the view that this moral duty ought to some extent to be converted
into a legal obligation, and that the want of reasonable care to see that
statements, made under such circumstances, are true, should be made an
actionable wrong. But this is not a matter fit for discussion on the present
occasion. If it is to be done the legislature must intervene and expressly give
a right of action in respect of such a departure from duty. It ought not, I
think, to be done by straining the law, and holding that to be fraudulent which
the tribunal feels cannot properly be so described. I think mischief is likely
to result from blurring the distinction between carelessness and fraud, and
equally holding a man fraudulent whether his acts can or cannot be justly so
designated.
It now remains for me to apply what I
believe to be the law to the facts of the present case. The charge against the
defendants is that they fraudulently represented that by the special Act of
Parliament which the company had obtained they had a right to use steam or other
mechanical power instead of horses. The test which I purpose employing is to
inquire whether the defendants knowingly made a false statement in this respect,
or whether, on the contrary, they honestly believed what they stated to be a
true and fair representation of the facts. Before considering whether the charge
of fraud is proved, I may say that I approach the case of all the defendants,
except Wilde, with the inclination to scrutinise their conduct with severity.
They most improperly received sums of money from the promoters, and this
unquestionably lays them open to the suspicion of being ready to put before the
public whatever was desired by those who were promoting the undertaking. But I
think this must not be unduly pressed, and when I find that the statement
impeached was concurred in by one whose conduct in the respect I have mentioned
was free from blame, and who was under no similar pressure, the case assumes, I
think, a different complexion.
I must further remark that the learned
judge who tried the cause, and who tells us that he carefully watched the
demeanour of the witnesses and scanned their evidence, came without hesitation
to the conclusion that they were witnesses of truth, and that their evidence,
whatever may be its effect, might safely be relied on. An opinion so formed
ought not to be differed from except on very clear grounds, and after carefully
considering the evidence, I see no reason to dissent from Stirling J.'s
conclusion. I shall therefore assume the truth of their testimony.
I agree with the Court below that the
statement made did not accurately convey to the mind of a person reading it what
the rights of the company were, but to judge whether it may nevertheless have
been put forward without subjecting the defendants to the imputation of fraud,
your Lordships must consider what were the circumstances. By the General
Tramways Act of 1870 it is provided that all carriages used on any tramway shall
be moved by the power prescribed by the special Act, and where no such power is
prescribed, by animal power only 33 & 34 Vict c 78, s 34 . In order, therefore, to enable the company to use steam-power, an Act
of Parliament had to be obtained empowering its use. This had been done, but the
power was clogged with the condition that it was only to be used with the
consent of the Board of Trade. It was therefore incorrect to say that the
company had the right to use steam; they would only have that right if they
obtained the consent of the Board of Trade. But it is impossible not to see that
the fact which would impress itself upon the minds of those connected with the
company was that they had, after submitting the plans to the Board of Trade,
obtained a special Act empowering the use of steam. It might well be that the
fact that the consent of the Board of Trade was necessary would not dwell in the
same way upon their minds, if they thought that the consent of the Board would
be obtained as a matter of course if its requirements were complied with, and
that it was therefore a mere question of expenditure and care. The provision
might seem to them analogous to that contained in the General Tramways Act, and
I believe in the Railways Act also, prohibiting the line being opened until it
had been inspected by the Board of Trade and certified fit for traffic, which no
one would regard as a condition practically limiting the right to use the line
for the purpose of a tramway or railway. I do not say that the two cases are
strictly analogous in point of law, but they may well have been thought so by
business men.
I turn now to the evidence of the
defendants. I will take first that of Mr. Wilde, whose conduct in relation to
the promotion of the company is free from suspicion. He is a member of the Bar
and a director of one of the London tramway companies. He states that he was
aware that the consent of the Board of Trade was necessary, but that he thought
that such consent had been practically given, inasmuch as, pursuant to the
Standing Orders, the plans had been laid before the Board of Trade with the
statement that it was intended to use mechanical as well as horsepower, and no
objection having been raised by the Board of Trade, and the Bill obtained, he
took it for granted that no objection would be raised afterwards, provided the
works were properly carried out. He considered, therefore, that, practically and
substantially they had the right to use steam, and that the statement was
perfectly true.
Mr. Pethick's evidence is to much the
same effect. He thought the Board of Trade had no more right to refuse their
consent than they would in the case of a railway; that they might have required
additions or alterations, but that on any reasonable requirements being complied
with they could not refuse their consent. It never entered his thoughts that
after the Board had passed their plans, with the knowledge that it was proposed
to use steam, they would refuse their consent.
Mr. Moore states that he was under the
impression that the passage in the prospectus represented the effect of sect. 35
of the Act, inasmuch as he understood that the consent was obtained. He so
understood from the statements made at the board by the solicitors to the
company, to the general effect that everything was in order for the use of
steam, that the Act had been obtained subject to the usual restrictions, and
that they were starting as a tramway company, with full power to use steam as
other companies were doing.
Mr. Wakefield, according to his
evidence, believed that the statement in the prospectus was fair; he never had a
doubt about it. It never occurred to him to say anything about the consent of
the Board of Trade, because as they had got the Act of Parliament for steam he
presumed at once that they would get it.
Mr. Derry's evidence is somewhat
confused, but I think the fair effect of it is that though he was aware that
under the Act the consent of the Board of Trade was necessary, he thought that
the company having obtained their Act the Board's consent would follow as a
matter of course, and that the question of such consent being necessary never
crossed his mind at the time the prospectus was issued. He believed at that time
that it was correct to say they had the right to use steam.
As I have said, Stirling J. gave credit
to these witnesses, and I see no reason to differ from him. What conclusion
ought to be drawn from their evidence? I think they were mistaken in supposing
that the consent of the Board of Trade would follow as a matter of course
because they had obtained their Act. It was absolutely in the discretion of the
Board whether such consent should be given. The prospectus was therefore
inaccurate. But that is not the question. If they believed that the consent of
the Board of Trade was practically concluded by the passing of the Act, has the
plaintiff made out, which it was for him to do, that they have been guilty of a
fraudulent misrepresentation? I think not. I cannot hold it proved as to any one
of them that he knowingly made a false statement, or one which he did not
believe to be true, or was careless whether what he stated was true or false. In
short, I think they honestly believed that what they asserted was true, and I am
of opinion that the charge of fraud made against them has not been
established.
It is not unworthy of note that in his
report to the Board of Trade, General Hutchinson, who was obviously aware of the
provisions of the special Act, falls into the very same inaccuracy of language
as is complained of in the defendants, for he says: “The Act of 1882 gives the
company authority to use mechanical power over all their system.”
I quite admit that the statements of
witnesses as to their belief are by no means to be accepted blindfold. The
probabilities must be considered. Whenever it is necessary to arrive at a
conclusion as to the state of mind of another person, and to determine whether
his belief under given circumstances was such as he alleges, we can only do so
by applying the standard of conduct which our own experience of the ways of men
has enabled us to form; by asking ourselves whether a reasonable man would be
likely under the circumstances so to believe. I have applied this test, with the
result that I have a strong conviction that a reasonable man situated as the
defendants were, with their knowledge and means of knowledge, might well believe
what they state they did believe, and consider that the representation made was
substantially true.
Adopting the language of Jessel M.R. in
Smith v. Chadwick 20 Ch D at p 67 , I conclude by saying that on the whole I have come to the conclusion
that the statement, “though in some respects inaccurate and not altogether free
from imputation of carelessness, was a fair, honest and bonâ fide statement on
the part of the defendants, and by no means exposes them to an action for
deceit.”
I think the judgment of the Court of
Appeal should be reversed.
