Dovey v Cory [1901] A.C. 477

Court: House of Lords

Facts: A bank suffered from accounting fraud and improper advances made by its manager and chairman. The issue was whether a co-director, who was innocent of complicity in the fraud, was liable for negligence for failing to discover the frauds.

Issue: Whether a director’s duty to exercise reasonable care, skill, and diligence extends to discovering frauds perpetrated by other officers of the company.

Held: The court held that the director was not liable because directors are entitled to trust their appointed officers and delegate duties to them.

Key Judicial Statement: Earl of Halsbury LC noted: “It is obvious if there is such a duty [of detecting frauds] it must render anything like an intelligent devolution of labour impossible … I cannot think it can be expected of a director that he should be watching either the inferior officers of the bank or verifying the calculations of the auditor himself. The business of life could not go on if people could not trust those who are put into a position of trust for the express purpose of attending to details of management.”

💡Leveluplaw: Directors have a duty to oversee and act with reasonable care, but they are not expected to personally detect frauds committed by trusted officers. Delegation and reliance on the integrity of appointed officers are acceptable as long as reasonable care is exercised.