Matthews v Smith

To establish fraudulent misrepresentation, a claimant must prove that a false representation was made knowingly, recklessly, or without honest belief in its truth, and that it materially influenced the decision to act. A merely careless statement, honestly believed to be true, is insufficient. The court must assess the maker’s state of mind and means of knowledge at the material time. A representation not pleaded as false cannot ordinarily constitute an operative fraudulent misrepresentation. Where alleged representations are not proved, or reliance and fraud are not established, the claim fails even if the defendant’s conduct was seriously careless or over-optimistic.

The claimant lent £150,000 to Archangel Filmworks Limited, a company of which the defendant was a director. He alleged that the defendant made fraudulent oral representations concerning Archangel’s value, proposed security, rights and expected proceeds from the film Spirit Trap, the purpose of the loan, and the company’s creditors. The loan was not repaid after Archangel entered administration. The central issues were whether the representations were made, whether they were false and fraudulent, and whether the claimant relied on them when making the loan.

1. The claim for fraudulent misrepresentation was dismissed. The claimant failed to prove that the principal alleged representations were made at the Landmark Hotel meeting.
2. Under Derry v Peak (1889) 14 App. Cas. 337, fraud requires a false statement made knowingly, recklessly, or without honest belief in its truth. Carelessness and lack of reasonable grounds do not by themselves establish fraud where the statement was honestly believed.
3. The claimant must also prove reliance. The representation need not be the sole cause of the transaction, but it must have materially influenced the claimant’s decision.
4. The alleged representations concerning a £6 million valuation, a sale of 75 per cent of Archangel, a £1.5 million value for the defendant’s retained shares, use of the sale and leaseback as security, and the absence of major creditors were not proved. The claimant’s evidence was unreliable on these matters, and the contemporaneous documents supported the defendant’s account.
5. The claimant did not plead that the representation that all outstanding film fees had been paid was false, nor did he establish reliance on it. The alleged representation that the loan was required solely for distribution costs was inconsistent with the loan agreement and was not established.
6. Even if the defendant had represented that Archangel owned the relevant rights in Spirit Trap, the evidence disclosed confusion rather than fraudulent dishonesty, and reliance was not proved. The claimant’s conclusion that the company was financially sound resulted principally from the financial documents supplied to him.
7. The defendant had failed to disclose the true financial position and her conduct might have supported a negligence claim. That did not satisfy the stricter requirements of fraudulent misrepresentation.

First-instance judgment. No prior appellate decision is stated in the judgment.