Facts: Derry issued a company prospectus which stated that the company was authorised to use steam-driven trams. In fact, the necessary authority had been applied for, but the Board of Trade had not yet granted it when the prospectus was issued. Derry believed that obtaining the Board of Trade's consent was a mere formality. Peek, relying on the information in the prospectus, purchased shares in the company. When the Board of Trade refused to grant the authority to use steam trams, the company failed. Peek sued Derry, one of the directors of the company, claiming damages for fraudulent misrepresentation.
Issue: Had there been a fraudulent misrepresentation?
Decision: The court held that in this case the directors had not been fraudulent, although they might have been negligent.
Reason: The court held that because Derry had honestly believed that obtaining the necessary permission was only a formality, there had been no fraud. Lord Herschell said (at 374):
"[I]n order to sustain an action of deceit, there must be proof of fraud... 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... To prevent a false statement being fraudulent, there must, I think, always be an honest belief in its truth."