Clarke v Dickson (1858) El Bl & El 148; 120 ER 463
Court of Queen’s Bench — 26 April 1858
Facts
Clarke alleged that three directors had fraudulently induced him to take shares in the Welsh Potosi Lead and Copper Mining Company in 1853. The business operated on the cost-book principle, a form of mining partnership. Clarke paid deposits for his shares.
The mine was worked during 1854, 1855 and 1856. Dividends were declared, and Clarke accepted additional shares instead of cash. In 1857, when the business was in difficulty, it was registered as a limited liability company with his assent. It subsequently went into winding up.
Clarke said that he discovered the fraud during the winding-up process, including that the dividends had been improperly paid out of capital. He sought to recover his deposits through an action for money had and received, relying on rescission of the share contract.
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Procedural history
Lord Campbell CJ stopped the claim after counsel’s opening statement. He held that, even assuming the alleged fraud could be proved, this form of action could not succeed on the facts put forward. Clarke then sought a new trial. The court was therefore deciding the legal sufficiency of his own account, rather than making findings after a full trial of the fraud allegations.
Issue
Could Clarke unwind the transaction and recover the original price when he could no longer return the interest he had acquired in its original condition?
Decision
The court refused a new trial. Clarke could not rescind and recover his deposits through this action. Erle J, Crompton J and Lord Campbell CJ agreed that his possible remedy was an action for deceit to recover the loss actually caused by the alleged fraud.
Reasoning
The court distinguished a void contract from a voidable one. Fraud did not automatically make the transaction a nullity. Although the defrauded party could elect to rescind, that remedy required restoration of what had been received.
Clarke had participated in the mining venture for several years and received additional shares as dividends. More decisively, the nature of his investment had changed: the partnership shares had become shares in a limited liability company, which was now being wound up. He could not return the original partnership interest, and obligations to other participants also stood in the way.
Crompton J explained the problem by comparing it to buying live cattle and then slaughtering them. Even if the purchase had been induced by fraud, returning the resulting meat would not restore the original transaction.
The obstacle was therefore the inability to restore the parties’ original position, including the changed nature of the shares. The judgment was not simply a ruling that a fall in investment value prevents recovery. A deceit claim remained possible, but Clarke would have to prove his allegations and the actual damage sustained; the court awarded no damages in these proceedings.
