Smith v Chadwick

JurisdictionEngland & Wales
CourtCourt of Appeal
[COURT OF APPEAL] SMITH v. CHADWICK. [1876. S. 166.] 1881 Nov. 23, 24, 25, 26, 28, 29. 1882 March 13, 14, 17. FRY, J. JESSEL, M.R., COTTON and LINDLEY, L.JJ.

Action for Deceit - Promoters of Company - Misrepresentation in Prospectus - Ambiguous Representations - Contemporaneous Documents.

In an action for deceit, if it is proved that the Plaintiff did not rely upon the false statement complained of, he cannot maintain the action.

If the name of a person is improperly placed on the list of directors in the prospectus of a company, it must depend upon the circumstances of the case whether it is a material misstatement.

If a statement, by which the plaintiff says he has been deceived, is ambiguous, the plaintiff is bound to state the meaning which he attached to it, and cannot leave the Court to put a meaning upon it.

The prospectus of a company stated that the present value of the turnover or output of the entire works was more than a million sterling per annum. The Plaintiff complained that that was untrue, but declined to state the meaning which he attached to the words “turnover or output,” except that he understood them in their ordinary meaning:—

Held, that the expression was ambiguous, and that as the Plaintiff did not state in what sense he understood it, he could not rely upon the misstatement as a ground of action.

If a statement, although untrue to the knowledge of the Defendants, is so trivial that it could not in the opinion of the Court have influenced the conduct of the Plaintiff, it will not support an action for deceit.

A misstatement of the valuation of the property of a company to the amount of £3000 out of £301,000 held not to be a material misstatement.

The prospectus of an iron working company stated that the purchase-money for the works was to be paid by instalments, the amount of which was mentioned, but it did not state, according to the fact, that interest was to be paid on the instalments:—

Held, that the omission of mention of the interest was not a material misstatement.

The Defendants sent to the Plaintiff the prospectus of a company, for whom they acted as agents, on the faith of which the Plaintiff took shares in the company. A few days afterwards the Defendants sent the Plaintiff a circular containing other statements concerning the company, but the Plaintiff did not receive it till after he had taken the shares:—

Held, that the circular could not be taken as a contemporaneous document with the prospectus, and could not be read for the purpose of explaining it.

The judgment of Fry, J., reversed.

THIS was an action brought by William Smith, a steel manufacturer at Sheffield, against Messrs. Chadwick, accountants, carrying on business in London and Sheffield, for damages alleged to have been sustained by the Plaintiff by his having been induced to take shares in the Blochairn Iron Company (Limited), by the fraudulent misrepresentations of the Defendants.

The company was formed in the early part of the year 1873, for the purpose of purchasing from Messrs. Hannay & Sons the Blochairn Ironworks near Glasgow, and also the Nether Johnstone Colliery, which Messrs. Hannay were under contract to purchase.

The alleged misrepresentations were contained in a prospectus dated the 27th of May, 1873, signed by the Defendants, and a circular letter from them bearing the same date, which accompanied it.

The prospectus contained the names of the directors, among whom appeared the name of James J. Grieve, Esq., M.P. for Greenock. It stated, among other things, that the company was formed for the purchase of the ironworks of Messrs. Hannay & Sons as Blochairn, and their collieries at Nether Johnstone;

That the whole of the properties had been valued under the Defendants' instruction, and the total value, exclusive of stocks and stores, amounted to £301,000;

That the stocks and working capital might be estimated at about £200,000;

That the purchase-money was to be payable to Messrs. Hannay as follows:— £100,000 in 2000 fully paid-up shares of £50 each, and the remainder in cash in four instalments, namely, one-fourth on taking possession of the property, one-fourth in six months, one-fourth in twelve months, and the balance in eighteen months;

That in making the valuation there had been no addition for goodwill;

That the ironworks were the largest and most important in Scotland, and had been equipped in a substantial, complete, and permanent manner; and that they would then produce at the rate of 1500 tons of finished bars and plates per week, or about 75,000 tons per annum;

That the rolling mills with some slight alterations would be capable of turning out 90,000 tons of manufactured iron per annum;

That the present value of the turnover or output of the entire works was over £1,000,000 sterling per annum;

That the land on which the works stood was about 17 acres and was held in perpetuity, subject only to a very reasonable ground rent or feu duty.

The contract between Messrs. Hannay and one of the Defendants, who was a trustee for the company, was referred to: and it was stated that copies might be seen at the Defendants' offices in Glasgow and London.

In the circular letter which accompanied this prospectus the Defendants said, “We have much confidence in recommending this investment to our friends: and request to be favoured with your early application”F1.

On the 4th of June the Plaintiffs sent in an application for a hundred £50 shares in the company on the faith, as he alleged, of the statement in the prospectus. These shares were afterwards allotted to him, and he eventually paid the whole amount due on them, namely, £5000.

On the 25th of July, 1874, the company being unsuccessful, a resolution was passed for winding it up voluntarily.

On the 5th of May, 1876, the Plaintiff brought the present action against Messrs. Chadwick, claiming £5750 as damages sustained by him by having been induced to take shares in the company by the fraudulent misrepresentations of the Defendants.

The misrepresentations alleged in the statement of claim were principally as follows:—

That Mr. Grieve was untruly stated to be a director of the company;

That the prospectus in stating the mode in which the instalments on the purchase-money were to be paid, did not mention that interest at £5 per cent. was to be paid on the instalments, and that the company was to give bills for the principal and interest of such instalments;

That the statement that in making the valuation there had been no addition for goodwill led the Plaintiff to suppose that the goodwill was valuable, whereas it was quite worthless;

That the statement that the ironworks were equipped in a substantial and complete manner, and that they could then produce at the rate of 1500 tons of finished bars and plates per week, was not true;

That the statement that the present value of the turnover or output of the entire works was £1,000,000 per annum was not true;

That the valuation made of the land comprised twenty acres, whereas only seventeen acres were included in the purchase by the company. The circumstances under which this was done are fully stated in the judgments of Mr. Justice Fry and the Master of the Rolls.

The Plaintiff also complained that he had been misled by the statements in a publication called “Chadwick's Investment Circular,” drawn up by one of the Defendants, a copy of which was sent to the Plaintiff on the 3rd of June. In that circular it was stated that the works had been purchased at a valuation based on their actual capacity and profits over a series of years, whereas the Plaintiff alleged that no profits, but on the contrary, large losses had been made for several years past; and it was further stated that the annual turnover was £1,000,000. It appeared however that this circular was not actually received by the Plaintiff till after he had sent in his application for the shares.

With respect to the statements in the prospectus, the following facts were established by the evidence. Mr. Grieve had originally given his consent to be a director: and on the 24th of May, 1873, while the prospectus was in preparation, the Defendants wrote to him asking him to sign the memorandum and articles of association which were sent to Scotland for the other directors to sign: but Mr. Grieve telegraphed in reply on the 26th of May, “Your movements are too rapid for me; cannot conclude finally till I hear from Mr. Morton to-morrow regarding necessary inquiries.” The Defendants, however, expecting that the answer of Mr. Morton, who was himself a director, would be satisfactory, issued the prospectus without striking out Mr. Grieve's name. The Plaintiff also admitted in his cross-examination that he had never heard of Mr. Grieve before, and only knew his name from seeing it in the prospectus; and when asked if his name had any effect in inducing him to join the company, he shook his head.

The estimate of the quantity of finished bars and plates which the works were capable of turning out was based on the valuations of Mr. Hulse and Mr. Armstrong, surveyors, who certified that the works were constructed and equipped in a substantial, complete, and permanent manner, and in full operation could produce 1500 tons of finished bars and plates per week, or about 75,000 tons per annum. The estimate of the turnover or output was as calculated on the same power of production, at the then current price of iron.

With respect to the paragraph in the prospectus respecting the turnover or output, a question arose as to the true meaning of the words used, and the Plaintiff in his answers to interrogatories as to the meaning which he put upon the misrepresentations alleged in the statement of claim said, “I understand the meaning of such misrepresentations to be that which the words composing them obviously convey, and I am unable to express in any other words what I understood to be the meaning thereof.”

The Plaintiff and Defendants and several...

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