‘…fraud is proved when it is shewn that a false representation has been made (1) knowingly, or (2) without belief in its truth, or (3) recklessly, careless whether it be true or false. Although I have treated the second and third as distinct cases, I think the third is but an instance of the second, for one who makes a statement under such circumstances can have no real belief in the truth of what he states. To prevent a false statement being fraudulent, there must, I think, always be an honest belief in its truth.’
Derry v Peek (1889) 14 App Cas 337, 374 (Lord Herschell).
‘if I thought that a person making a false statement had shut his eyes to the facts, or purposely abstained from inquiring into them, I should hold that honest belief was absent, and that he was just as fraudulent as if he had knowingly stated that which was false.’
Derry v Peek (1889) 14 App Cas 337, 376 (Lord Herschell).
On 21 July 1989, C (Smith) was induced by a fraudulent misrepresentation by an employee (Roberts) of D2 (Citibank), which was acting as broker for D1 (Scrimgoeur Vickers), to acquire shares in a company (Ferranti). In September 1989, it emerged that Ferranti had been the victim of a fraud (by one Guerin), and its share price fell dramatically. C then sold its shares in Ferranti at prices ranging from 49p to 30p, incurring a total loss of over £11.4m.
The judge dismissed the claim against D1 but held that D2 was liable in damages to C, such damages being calculated as the difference between the price paid for the shares (84.5p/share) and the actual value as at July 1989 (ie had the market known of the Guerin fraud) (44p), amounting to £10.8m.
The CA held that the correct measure of damages was the difference between the price paid and the market price of the shares as at July 1989 (78p), amounting to £1.2m.
The HL held in turn that the correct measure was the difference between the price paid and the amount eventually realised on re-sale. (On the facts, C was limited to recovery of £10.8m, because it had not appealed against the judge’s award, and so that stood).
According to Lord Browne Wilkinson (at 267), where a claimant has been induced by a fraudulent misrepresentation to buy property, damages are to be assessed as follows:
‘(1) the defendant is bound to make reparation for all the damage directly flowing from the transaction;
(2) although such damage need not have been foreseeable, it must have been directly caused by the transaction;
(3) is assessing such damage, the plaintiff is entitled to recover by way of damages the full price paid by him, but he must give credit for any benefits which he has received as a result of the transaction;
(4) as a general rule, the benefits received by him include the market value of the property acquired as at the date of acquisition; but such general rule is not to be inflexibly applied where to do so would prevent him obtaining full compensation for the wrong suffered;
(5) although the circumstances in which the general rule should not apply cannot be comprehensively stated, it will normally not apply where either (a) the misrepresentation has continued to operate after the date of the acquisition of the asset so as to induce the plaintiff to retain the asset or (b) the circumstances of the case are such that the plaintiff is, by reason of the fraud, locked into the property.
(6) In addition, the plaintiff is entitled to recover consequential losses caused by the transaction;
(7) the plaintiff must take all reasonable steps to mitigate his loss once he has discovered the fraud.’
‘The plaintiff in an action for deceit is not entitled to be compensated in accordance with the contractual measure of damage, ie the benefit of the bargain measure. He is not entitled to be protected in respect of his positive interest in the bargain . . .’
Smith New Court Securities Ltd v Citibank NA [1997] AC 254, 281 (Lord Steyn).
‘There is in truth only one legal measure of assessing damages in an action for deceit: the plaintiff is entitled to recover as damages a sum representing the financial loss flowing directly from his alteration of position under the inducement of the fraudulent representations of the defendant.’
Smith New Court Securities Ltd v Citibank NA [1997] AC 254, 284 (Lord Steyn).
Maurer operated two hairdressing salons in Bournemouth. When negotiating the sale of one of the salons (the Exeter Road salon) to Mr and Mrs East, Maurer said that he had no intention of working at his remaining salon (at Canford Cliffs) unless a staff emergency arose such as illness. The Easts bought the Exeter Road salon for £20,000. However business soon began to fall away at an alarming rate. It turned out that Maurer was working full time at the Canford Cliffs salon. For three years Mrs East tried to make the Exeter Road salon profitable, spending significant sums on advertising and installing a solarium. After various attempts, Mrs East managed to sell the business for £7,500.
The judge awarded damages of a little over £33,000, together with interest. The damages comprised (i) the difference between the acquisition and disposal prices, (ii) the cost of fees and expenses in acquiring and selling the business together with the cost of improvements (iii) trading losses (iv) loss of profit for the period of ownership (£15,000), and (v) disappointment and inconvenience (£1,000).
Maurer appealed against the award of £15,000 for loss of profit, arguing that damages for loss of profit were not recoverable in deceit. The Court of Appeal held that damages for loss of profit should have been based on the profit that Mrs East might have made had the representation not been made: that required an assessment of the profit she might have made had she bought an alternative hairdressing business. The Court of Appeal substituted a figure of £10,000 for that awarded by the judge.
‘It is objected that the loss of profits is not properly recoverable because it is appropriate not to a claim in fraud but to a claim based on a contractual warranty of profits, for in such a case the loss of profits does not stem from the making of the contract but from the fact that the profit made was not what was anticipated . . . [but] the loss of profits awarded relates to the hypothetical profitable business in which the plaintiffs would have engaged but for buying the [defendant’s] business, and the profits of the latter are treated by the judge solely as some evidence of what the profits of the other business might have been. In my judgment there is no error of principle here.’
Mustill LJ at 468.
C entered into a distributorship agreement with D under which C agreed to market and distribute certain of D’s products in France. The agreement provided for C to purchase its supplies of D’s products at fixed prices. Although C was able to distribute Ds products profitably, C claimed it had been induced to enter into the agreement by a fraudulent misrepresentation made by D as to product-pricing. The trial judge awarded damages amounting to the difference between the prices C actually paid for D’s products and the more favourable prices C may have been able to secure had the misrepresentation not been made. D appealed on the basis that damages awarded by the judge represented damages for loss of bargain whereas damages for deceit are available only to compensate for loss suffered. The Court of Appeal unanimously dismissed the appeal.
You cannot copy content of this page
