The writ in this action was issued on the 4th of February, 1885, a few days after the petition for winding-up, by Sir H. Peek, against the chairman and directors named above, claiming in the first instance a rescission of the contract for shares and repayment of the money paid by him, and damages; but the writ was afterwards amended, and claimed only damages for the misrepresentations in the prospectus and circular.
The defence pleaded by the defendants was that they did not represent, or intend to represent, in the prospectus and circular, that the company had an absolute right to use steam or other mechanical power; that the plaintiff knew that the use of steam-power was never, or seldom, given unconditionally to a tramway company, and that he was acquainted, or might have made himself acquainted, with the provisions of the company’s special Act, which was referred to in the prospectus, and might be seen at the company’s office; and they denied that the plaintiff was induced to take the shares by the representations complained of. They also pleaded that if the statements complained of were untrue, they were made by the defendants in good faith, and that they had reasonable grounds for believing them to be true: that in fact the consent of the corporation of Plymouth to the use of steam was given in June, 1883, and the consent of the Board of Trade to its being used in a portion of the tramways had also been given.
The action came on for hearing before Mr. Justice Stirling. At this hearing the parties testified.
Stirling, J., came to the conclusion that the directors all believed that the company had the right stated in the prospectus; and that their belief was not unreasonable, and their proceedings so reckless or careless, that they ought to be fixed with the consequences of deceit. He ordered the action to be dismissed.[[338]]
On appeal by plaintiff to the Court of Appeal, the judgment of Stirling, J., was reversed by Cotton, Hannen, and Lopes, L.JJ. They held the directors liable in this action for deceit, on the ground that they made the statement without any reasonable ground for believing it to be true. L. R. 37 Ch. Div. 541.
The defendants, Derry, et al., appealed from the decision of the Court of Appeal to the House of Lords.
The House of Lords unanimously reversed the judgment of the Court of Appeal, and restored the order of Stirling, J. Opinions were delivered by Lords Halsbury, Watson, Bramwell, Fitzgerald, and Herschel.
Portions of the opinion of Lord Herschell are as follows:—
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.