Citation. 14 App.Cas. 337 (House of Lords, 1889).
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Plaintiff brought suit after it bought shares in Defendant’s company, under the belief that Defendant would have the right to use steam power, as opposed to other companies, which would not.
Synopsis of Rule of Law.
Misrepresentation, alone, is not sufficient to prove deceit.
Facts.
Plaintiff received a prospectus regarding the incorporation of Defendant’s company, which highlighted that the company would have the right to use steam or mechanical power. After receiving the prospectus, Plaintiff bought shares of the company, relying on the allegations of the prospectus, and believing that the company had the absolute right to use steam or mechanical power. The board of trade refused to allow steam or mechanical power, and the company was wound up, unable to complete its work. Thereafter, Plaintiff brought suit against Defendant for fraudulent misrepresentations. The trial judge dismissed the action, after coming to the conclusion that the directors knew that the use of steam or mechanical power was contingent on the board of trade and it was not unreasonable or deceitful for them to rely on the board. On appeal, the dismissal was reversed, because the court found that the Defendants may have reasonably believed the prospectus and, because they did not have reasonable grounds for what they wrote in the prospectus, they should be held liable for Plaintiff’s reliance. Defendant appealed.
Issue.
Whether it is deceit when a company forms a prospectus to solicit investors, which later proves to be wrong?
Held.
Reversed.
The House of Lords reversed the judgment of the court of appeals, and reinstated the judgment of the lower court. The court found this to be an action of deceit, under which the establishment of misrepresentation alone is not enough to prove liability. In this case, Plaintiff relied on the prospectus, which may have been misrepresentation, but Defendants reasonably believed they could glean approval of the board of trade and should not be held liable for their later failure to do so.
Discussion.
An action of deceit will only stand in a court when a plaintiff can show not only misrepresentation, but also that defendants knew they would be unable to follow through with their representations.
