Story Case

The Hepp Hardware Co. sold a binder to F. E. Small, a farmer. The company said that it would bind over 50 acres per day. On the faith of this representation Small purchased the binder. Before paying for it, he discovered that the Hepp Company, although acting in good faith, were mistaken and that the binder could at most work not more than 40 acres a day. He refused to accept and pay for the binder and was sued for the price by the company.

He defends on the ground that the company misrepresented the capacity of the binder and, if it had not been for the misrepresentation, he would not have contracted to buy it. The company answered, that the statement was made in good faith. He replied that the company should have known better and that, with a little investigation, the company could have learned that the capacity was much less than represented. Which party has the better case?

Ruling Court Case. Henry Peck Vs. William Derby, Law Reports, Volume 14 Appeal Cases (English), Page 337

By the English Parliament, a special act was passed incorporating a tram company. This act provided that the vehicles might be moved by animal power, and, with the consent of the Board of Trade, steam power might be used. "William Derby, a director of the company, issued a prospectus of the company containing a statement that by a special act of parliament the company had the right to use steam power instead of horses. Henry Peck bought shares in the company, in reliance upon the statement that steam power was to be used. The Board of Trade afterwards, when applied to for the privilege provided in the act, refused to grant it to the company. The company, therefore, was unsuccessful and was dissolved. Thereupon, Henry Peck brought this action for damages. He claimed that the statement of the director, William Derby, was so carelessly made, that it amounted to fraud.

Derby contended that it was not fraudulent, because it was an innocent misrepresentation.

Decision

A false representation amounts to fraud when it is made by one in a reckless manner without regard to the truth or untruth of the statement. In this case, the representation was partially false, but it was not shown that Derby made it in such a reckless manner that it amounted to fraud.

Lord Bramwell said:" 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 for deceit".

A man who makes a statement without care and regard for its truth or falsity commits a fraud. It is not proven that this is the situation in this case.

Judgment was given for William Derby.

Ruling Law. Story Case Answer

Hereafter, it will be seen that the consequences which follow from fraudulent misrepresentation are different from the consequences which arise out of more innocent misrepresentations. It may be stated that when a representation is made by a person, without regard for its truthfulness or untruthfulness, or is made recklessly by that person, without care for its truth or falsity the misrepresentation becomes fraudulent. In the Story Case, whether the misrepresentation made by Hepp Hardware Company was fraudulent, depends upon whether it was made recklessly without regard to its truth or falsity; if it was so made, it amounts to fraud. The fact that slight investigation on their part would have revealed to them the incapacity of the machine to do the work they claimed for it, probably amounts to a disregard of the truth or a falsity of their statements. Judgment should be given for Small on this theory.