(v.) that such representations induced the plaintiff to take certain action; and

(vi.) that the plaintiff has thereby suffered damage.

The representations must be made either by the defendant himself or by some agent whom he has duly authorised in that behalf; and they must be made either to the plaintiff himself, or to some third person with the intention and desire that he should repeat them to the plaintiff. The action, which the plaintiff is induced to take in reliance upon such representations, may be of any kind which causes him damage; but it very often is the entering into a contract. If the plaintiff be induced to enter into a contract by a misrepresentation which is innocently and not fraudulently made, he is entitled to have the contract rescinded if he applies for such relief in time,1 but he is not entitled to recover any damages. Damages are the penalty of deceit.

That the defendant acted fraudulently will give no ground of action to a plaintiff, unless the damage which he has suffered is the direct consequence of the defendant's fraudulent act; it must, as a rule, be either a natural and necessary consequence of his words or a result which he himself contemplated at the time when he made the representation. Whenever A. fraudulently makes a representation which is false, and which he knows to be false, to B., meaning that B. shall act upon it, and B., believing it to be true, does act upon it and thereby sustains damage, A. will be liable to an action for damages at suit of B.2

If A. gives B. a good character for honesty and B. by means of that character obtains a situation in C.'s warehouse and subsequently embezzles C.'s money, A. will not be responsible for this loss, unless he knew that what he wrote was false and wrote it with the object of obtaining that situation for B.

A defendant who has fraudulently made an untrue statement is, as a rule, only liable to pay damages to those persons to whom he made the statement, or to whom he intended it

1 Redgrave v. Hurd (1881), 20 Ch. D. 1; and see post, p. 722.

2 Swift v. Jewsbury (1874), L. R. 9 Q. B. 301; Smith v. Chadwick (1884), 9 App. Cas. 187; Edgington v. Fitzmaurice (1885), 29 Ch. D. 459, 482.

should be communicated, and whom in either case he intended to act upon it. If one of those persons of his own accord, whether fraudulently or innocently, repeats that statement to others, the originator of the statement will not be liable to those others, unless it can be shown that he intended and desired that his statement should be repeated to them. But if a statement be published in a newspaper with the object of influencing the readers of that paper generally, any one who has read the statement in that newspaper and acted upon it may claim that it was made to him; and he can sue the defendant if he has sustained any loss through the defendant's misrepresentation.1

Thus, in the case of a prospectus of an intended company which conceals material facts or contains express misrepresentations of the truth, where the plaintiff receives a copy from the directors or their agents inviting him to take shares and on the strength of the false statements in it applies to the directors for shares, which are allotted to him and turn out to be worthless, he can recover from the directors the money paid for the shares. It was held in Peek v. Gurney and others that the proper purpose of a prospectus of an intended company is to invite persons to become allottees of the shares; and that when it has performed this office, it is exhausted. But such a prospectus is now, as a rule, very widely circulated and advertised in newspapers, and it must therefore be taken to influence all who read it in the newspapers as well as those to whom it is sent personally by the directors or their agents. Hence, there may be circumstances under which directors will be liable to a person who bought shares in the open market, provided he did so on the faith of the false statements contained in the prospectus, whether he personally received a copy of it or whether he merely saw it in a newspaper.3

The main difficulty in the way of a plaintiff, who sues the promoter or a director of a company for a fraud which has caused him damage, is to connect the particular defendant with the fraud complained of, and so make him responsible for its consequences. Sometimes doubtless this may be done directly, e.g., where the defendant has signed prospectuses, has attended and taken part at meetings of the directors or shareholders, or has surreptitiously received moneys belonging to the company. More often, perhaps, the defendant can

1 Gerhard v. Bates (1853), 2 E. & B. 476.

2 (1873), L. R. 6 H. L. 377; and see Weir v. Barnett and others (1877), 3 Ex. D. 32; Weir v. Bell and others (1878), 3 Ex. D. 238. 3 Andrews v. Mockford, [1896] 1 Q. B. 372.

only be made liable by means of the relation of principal and agent.1

But cases frequently occurred in which the directors of a new company, who issued the prospectus, were not aware that the statements which they so issued were untrue. They were misled by the promoters of the company and innocently published the facts and figures laid before them, and were therefore not liable to those who were defrauded by means of such facts and figures. To meet this difficulty an Act was passed, which renders all persons, who authorise the issue of a prospectus or notice, soliciting applications for shares or debentures in a company, liable in certain cases for any untrue statement contained in such prospectus or notice.2

Such persons are liable to pay compensation to any one who, on the faith of such prospectus or notice, has subscribed for shares, debentures or debenture stock, and has suffered damage by reason of any untrue statement contained in the prospectus or notice, or in any report or memorandum set out or referred to therein or issued therewith, unless they can prove

1. that, where the statement does not purport to be made on the authority of an expert or of a public official document or statement, they believed the statement to be true up to the time of allotment; or

2. that, where the statement purports to be made by an expert, or to be contained in what purports to be a copy of or extract from a report or valuation of an engineer, valuer, accountant or other expert, it fairly represented the statement made or was a correct and fair copy or extract, unless they had no reasonable ground for believing that the person making the statement, report or valuation was competent to make it; or

3. that, where the statement purports to be made by an official person, or to be contained in what purports to be a copy of or extract from a public official document, it was a fair and correct representation of such statement, copy or extract; or

4. that, having consented to become directors, they withdrew their consent before the issue of the prospectus or notice, and that the same was issued without their knowledge or consent; or

5. that the prospectus or notice was issued without their knowledge or consent, and that on becoming aware of its issue they forthwith gave reasonable public notice of such fact; or

6. that after the issue of such prospectus or notice and before allotment thereunder they, on becoming aware of any untrue statement therein, withdrew their consent thereto and caused reasonable public notice of such withdrawal, and of the reason therefor, to be given.3

1 See Weir v. Bell, suprà.

The Directors' Liability Act, 1890 (53 & 54 Vict. c. 64), re-enacted by the Companies. (Consolidation) Act, 1908 (8 Edw. VII. c. 69), s. 84.

3 See last note, and Macleay v. Tait, [1906] A. C. 24.

The term "promoter" as used in connection with a company has no very definite meaning; it involves "the idea of exertion for the purpose of getting up and starting the company (or what is called ‘floating' it), and also the idea of some duty towards the company imposed by or arising from the position which the so-called promoter assumes towards it."1 Thus the vendor of property, for which the public are asked to subscribe, may or may not be a promoter. But the term "promoter" within the Act does not include any person by reason of his acting in a professional capacity for persons engaged in procuring the formation of the company.2

In addition to his remedy against the directors or other persons, who have induced him to take shares by fraudulent mis-statements contained in the prospectus of a new company a shareholder may be entitled also to bring an action to compel the company, if it is not in liquidation, to take back the shares and repay him the money, which he paid for them, as money obtained by the company through the fraud of its agents.

"Where a company has obtained a benefit through the fraud of an agent, the person defrauded may recover back his money from the company on proof that "he paid his money

way

in consideration of certain statements and acts of the secretary, directors and managers of the company; that the circumstances under which they got the money were fraudulent; that the transaction was not bona fide but a fraudulent transaction to get his money without any consideration; and that the money found its into the coffers of the company." The company has derived a material benefit from the fraud of its agent. In such a case the principle is that he, who profits by the fraud of his agent, adopts the fraudulent act and becomes responsible to the party for any damage which he has sustained in consequence of the fraud; and this is so although the specific fraud was committed without any authority from him at the time.

4

It will be a great advantage to the shareholder if he can succeed in obtaining this relief, as his name will then be 1 Per cur. in Emma Silver Mining Co. v. Lewis (1879), 4 C. P. D. at p. 407. 2 S. 84 (5). "Expert" includes any person whose profession gives authority to a statement made by him. The Act also provides for indemnifying any person whose name has been improperly inserted as a director (s. 81 (3)), and for contribution from co-directors (s. 84 (4) ).

8 Per Grove, J., in Blake v. Albion Life Assurance Co. (1878), 4 C. P. D. at pp. 99, 100. See also Swire v. Francis (1877), 3 App. Cas. 106.

See per Cockburn, C. J., in Weir v. Bell (1878), 3 Ex. D. at p. 249.

struck off the register of shareholders, and he will not be liable to the creditors of the company-at all events not after a year has elapsed. A company differs in this respect from an ordinary partnership.

It is impossible, as a general rule, for a partner at any time to retire from or repudiate the partnership without first satisfying, or remaining bound to satisfy, the liabilities of the partnership. He may have been induced by the fraud of his co-partners to enter into the partnership, and that may be a ground of relief against them, but it is no ground for getting rid of a liability to creditors. This is the case whether the partnership is a going concern or whether it has stopped payment or become insolvent. In the case of a joint-stock company, however, the shares are in their nature and creation transferable, and transferable without the consent of creditors, and a shareholder, so long as the company is a going concern, can by transferring his shares get rid of his liability to creditors either immediately or after a certain interval. The assumption is that, while the company is a going concern, no creditor has any specific right to retain the individual liability of any particular shareholder. A shareholder therefore, so long as no proceedings have been commenced for winding up the company, may throw back upon the company shares which he has been induced to take by fraud without reference to any claims of creditors. If, however, the company has become insolvent and has stopped payment, serious injury might be inflicted on its creditors, could shares be then repudiated on such grounds; hence a shareholder, though grievously wronged, cannot at this stage rescind his original contract and retire from the concern.1

2

On a sale of property the fraud is not as a rule practised directly by the vendor on the purchaser; it often happens that an agent for the purchaser has received a gratuity from the vendor. Again, a vendor may be guilty of unfair concealment of facts which ought to be disclosed to a person seeking to purchase; such unfair concealment would amount to fraud, though there are cases in which, in the absence of active fraud, silence as to some fact which it would be material to the one party to know, but which the other is not legally bound to communicate, may involve the purchaser in loss, for which the law affords him no remedy.

3

When the vendor of land or minerals, with a view to the

1 Tennent v. City of Glasgow Bank (1879), 4 App. Cas. 615; Houldsworth v. City of Glasgow Bank (1880), 5 App. Cas. 317.

2 See Harrington v. Victoria Graving Dock Co. (1878), 3 Q. B. D. 549; Grant V. Gold Exploration, &c., Ltd., [1900] 1 Q. B. 233.

3 See the substance of Lord Hatherley's remarks in Erlanger v. New Sombrero Phosphate Co. (1878), 3 App. Cas. at pp. 1243, 1244.