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You are here: BAILII >> Databases >> United Kingdom House of Lords Decisions >> Smith New Court Securities v. Scrimgeour Vickers [1996] UKHL 3; [1997] AC 254; [1996] 4 All ER 769; [1996] 3 WLR 1051 (21 November 1996)
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Cite as: [1996] 4 All ER 769, [1996] UKHL 3, [1996] 3 WLR 1051, [1997] AC 254
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Smith New Court Securities v. Scrimgeour Vickers [1996] UKHL 3; [1997] AC 254; [1996] 4 All ER 769; [1996] 3 WLR 1051 (21st November, 1996)
(APPELLANTS)
(RESPONDENTS)
LORD BROWNE-WILKINSON
My Lords,
I have had the advantage of reading in draft the
speech to be delivered by my noble and learned friend, Lord Steyn. As to the
issue of liability raised by the cross-appeal, I agree with his reasoning and
conclusions: I would restore the judge's finding that Smith New Court Securities
Ltd. ("Smith") had established that Citibank N.A. (through Mr. Roberts)
fraudulently induced Smith to purchase the Ferranti shares by making the second
and third representations, but not the first representation.
The damages issue which is the subject-matter of the
appeal raises for decision for the first time in your Lordships' House the
question of the correct measure of damages where a plaintiff has acquired
property in reliance on a fraudulent misrepresentation made by the defendant.
The position in the present case is complicated by the fact that there are two
frauds involved. The first, "Roberts fraud," is the fraudulent representation
made by Mr. Roberts on behalf of Citibank on 21 July 1989 which induced Smith to
buy 28,141,424 Ferranti shares for £23,141,424. The second, "Guerin fraud," is
the fraud practised by Mr. Guerin on Ferranti. Although the Guerin fraud was
committed before 21 July 1989, its existence was unknown to Citibank, Smith,
Ferranti and the market until after that date. Shortly stated the question is
who should bear the risk of the Guerin fraud: Smith (which still held the
Ferranti shares when the Guerin fraud was discovered) or Citibank which by its
servant had fraudulently induced Smith to buy the Ferranti shares.
The relevant facts lie within a comparatively narrow
compass. The judge held that Smith bought the Ferranti shares at 82¼p as a
market making risk, i.e. with a view to holding them on its books over a
comparatively long period to be sold on at a later date. He further held that
Smith would not have bought at that price at all apart from the Roberts fraud.
Such a purchase is to be contrasted with a "bought deal" where the market maker
buys the shares with a view to its agency branch selling them on in smaller
parcels to its clients, such sales usually taking place within a matter of
hours. The judge held that, if Smith had been considering a bought deal, it
could not have bid more than 78p, at which price Citibank would not have sold to
Smith. From these facts, two points emerge: first, as a result of the Roberts
fraud Smith bought the Ferranti shares with a view to holding them for a
comparatively long period; second, if Smith had bid on the basis of a bought
deal, it would not have acquired the shares.
The history of the Ferranti shares subsequent to 21
July 1989 was as follows. On 11 August 1989 Ferranti published its Annual
Reports and Accounts for the year ending 31 March 1989 which confirmed the
results stated in a preliminary announcement made on 14 July 1989. On 11
September 1989 the directors of Ferranti announced that information had come to
their attention which required a restatement of the 1989 accounts. At their
request dealing in Ferranti shares was suspended. On 29 September the Chairman
of Ferranti wrote to the shareholders telling them that Ferranti had been the
victim of a major fraud by Mr. Guerin. Trading in Ferranti shares resumed on 3
October. On 17 November Ferranti published its revised audited accounts which
showed that the effect of the Guerin fraud was even worse than had been thought.
Smith had retained all the Ferranti shares which it
had bought on 21 July. But from 20 November 1989 onwards Smith began to trickle
these shares onto the market and obtained prices ranging from 49p down to 30p.
By 30 April 1990 it had sold them all for a total of £11,788,204, i.e. at a loss
of £11,353,220. It was not suggested at the trial that Smith's retention of the
shares until November 1989 or their subsequent sales were in any way
unreasonable.
The judge found that Smith first learned of Mr.
Roberts fraud on 5 December 1989 although there was evidence to suggest that by
mid-November 1989 Smith was suspicious of the truth of Mr. Roberts'
representations. On 2 January 1990 solicitors for Smith wrote to Citibank
purporting to rescind the contract for the purchase of the 28m. Ferranti shares.
At the trial, the claim to rescind was persisted in until the closing speech for
Smith when it was expressly abandoned for reasons not examined before your
Lordships. Thereafter the only claim by Smith has been for damages for deceit.
Both before the trial judge, Chadwick J. [1992] B.C.L.C. 1104, and the Court of
Appeal, Nourse, Rose and Hoffmann L.JJ. [1994] 1 W.L.R. 1271, the argument
proceeded on the basis that, where a fraudulent misrepresentation has induced
the plaintiff to enter into a contract of purchase, the measure of damages is,
in general, the difference between the contract price and the true open market
value of the property purchased, valued as at the date of the contract of
purchase. This was the law as laid down in a series of cases decided at the
end of the 19th century, usually in relation to shares purchased in reliance on
a fraudulent prospectus: see Twycross v. Grant (1877) 2 C.P.D. 469;
Waddell v. Blockey (1879) 4 Q.B.D. 678; Peek v. Derry (1887) 37 ChD 541 and subsequently treated as settled law by the Court of Appeal in
McConnel v. Wright [1903] 1 Ch 546. It was common ground that there was
one exception to this general rule: where the open market at the transaction
date was a false market, in the sense that the price was inflated because of a
misrepresentation made to the market generally by the defendant, the
market value is not decisive: in such circumstances the "true" value as at the
transaction date has to be ascertained but with the benefit of hindsight:
McConnel v. Wright.
Now in the present case the market value of the
Ferranti shares at the transaction date (21 July 1989) was inflated, since the
existence of the Guerin fraud was then unknown: there was, in one sense, a false
market. But that false market was not attributable to the fraud of the
defendant, Citibank: the Roberts fraud had no impact on the open market price.
The difference between Chadwick J. and the Court of Appeal lay in the fact that
Chadwick J. held that there was a latent defect (i.e. the Guerin fraud) in the
Ferranti shares and that, even though the false market was not due to the fraud
of Citibank, he had to find the "true" value of the Ferranti shares, using
hindsight. He accordingly valued the Ferranti shares at what would have been
their open market value had the market known of the Guerin fraud on 21 July
1989. The judge fixed this value at 44p per share giving a total true value of
the shares on the transaction date of £12,382,226. He accordingly awarded as
damages the difference between the contract price and that figure, i.e.
£10,764,005.
The Court of Appeal on the other hand took the view
that it was only legitimate, in the case of quoted shares, to depart from the
market price as at the transaction date where that price was falsified by the
defendant's misrepresentation. In all other cases the market value has to be
taken to be the quoted value. The Court of Appeal therefore reduced the damages
to £1,196,010, being the difference between the contract price and the value of
the shares at 78p a share, being the value at which on 21 July Smith itself
would have been prepared to buy. The Court of Appeal was conscious that, in so
holding, they were throwing the whole risk of catastrophic events onto the
innocent purchaser rather than the fraudulent vendor. But they held that such
injustice stemmed from the rigidity of two rules (both of which had been common
ground before them): first, the denial of rescission where a plaintiff cannot
return in specie the very shares which were the subject matter of the fraudulent
sale; second, the rule which requires the damages to be calculated as at the
date of sale.
As to the first rule referred to by the Court of
Appeal, the reasons why Smith abandoned their claim to rescind were not explored
before your Lordships. I will therefore say nothing about the point save that if
the current law in fact provides (as the Court of Appeal thought) that there is
no right to rescind the contract for the sale of quoted shares once the specific
shares purchased have been sold, the law will need to be closely looked at
hereafter. Since in such a case other, identical, shares can be purchased on the
market, the defrauded purchaser can offer substantial restitutio in integrum
which is normally sufficient.
As to the second rule referred to by the Court of
Appeal--the rule requiring damages to be assessed as at the date of the
transaction--Mr. Grabiner, for Smith, submitted that the basis on which the 19th
century cases were decided was erroneous and that later decisions show the right
approach to the assessment of damages. I agree with those submissions and rather
than consider the sterilities of the argument surrounding the 19th century cases
proceed at once to consider the more modern law.
As ever in considering damages in tort, the starting
point must be to repeat, yet again, the well-known statement of Lord Blackburn
in Livingstone v. Rawyards Coal Co. To that statement he added these important words
which are less frequently quoted: In Clark v. Urquhart In the High Court of Australia, Dixon J. in Potts
v. Miller (1940) 64 C.L.R.
282, 299-300, whilst loyally applying the old inflexible rule was
plainly unhappy with it: see also Toteff v. Antonas (1952) 87 C.L.R.
647. The decision which restated the law correctly is
Doyle v. Olby (Ironmongers) Ltd. [1969] 2 QB 158. In that case the
plaintiff had been induced by the fraudulent misrepresentation of the defendant
to buy an ironmonger's business for £4,500 plus stock at a valuation of £5,000.
Shortly after the purchase, he discovered the fraud and started the action. But
despite this he had to remain in occupation: "he had burned his boats and had to
carry on with the business as best he could." After three years, he managed to
sell the business for £3,700, but in the meantime he had incurred business
debts. Lord Denning M.R., after referring to Lord Atkin's dictum, stated the
principle as follows, at p. 167:
In the same case Winn L.J., said, at p. 168: The damages awarded by the Court of Appeal in that
case were calculated (admittedly on a rough and ready basis as to the figures)
as follows, at pp. 169-170. The plaintiff was treated as having lost £9,500, the
price paid for the business and stock. Against this, he had to give credit for
£3,500, i.e. not for the value of the business at the transaction date but for
the amount he actually received on the resale of the business three years later.
To this £3,500 there were added other benefits which he had received so as to
give a total of £7,000 benefits received to be set against the sum lost of
£9,500, i.e. a balance of loss of £2,500. In addition, the plaintiff was awarded
by way of consequential damages the sum of £3,000 in respect of liabilities
incurred by him in running the business. Thus the total award for direct and
consequential damages was £5,500. Doyle v. Olby (Ironmongers) Ltd. establishes
four points. First, that the measure of damages where a contract has been
induced by fraudulent misrepresentation is reparation for all the actual damage
directly flowing from (i.e. caused by) entering into the transaction. Second,
that in assessing such damages it is not an inflexible rule that the plaintiff
must bring into account the value as at the transaction date of the asset
acquired: although the point is not adverted to in the judgments, the basis on
which the damages were computed shows that there can be circumstances in which
it is proper to require a defendant only to bring into account the actual
proceeds of the asset provided that he has acted reasonably in retaining it.
Third, damages for deceit are not limited to those which were reasonably
foreseeable. Fourth, the damages recoverable can include consequential loss
suffered by reason of having acquired the asset. In my judgment Doyle v. Olby (Ironmongers)
Ltd. was rightly decided on all these points. It is true, as to the second
point, that there were not apparently cited to the Court of Appeal the 19th
century cases which established the "inflexible rule" that the asset acquired
has to be valued as at the transaction date: the successful appellant was not
legally represented. But in my judgment the decision on this second point is
correct. The old "inflexible rule" is both wrong in principle and capable of
producing manifest injustice. The defendant's fraud may have an effect
continuing after the transaction is completed, e.g. if a sale of gold shares was
induced by a misrepresentation that a new find had been made which was to be
announced later it would plainly be wrong to assume that the plaintiff should
have sold the shares before the announcement should have been made. Again, the
acquisition of the asset may, as in Doyle v. Olby (Ironmongers) Ltd.
itself, lock the purchaser into continuing to hold the asset until he can effect
a resale. To say that in such a case the plaintiff has obtained the value of the
asset as at the transaction date and must therefore bring it into account flies
in the face of common sense: how can he be said to have received such a value
if, despite his efforts, he has been unable to sell. Doyle v. Olby (Ironmongers) Ltd. has
subsequently been approved and followed by the Court of Appeal in East v.
Maurer [1991] 1 WLR 461 and Downs v. Chappell [1996] 3 All ER 344. In both cases the plaintiffs had purchased a business as a going concern in
reliance on the defendant's fraudulent misrepresentation. In each case after
discovery of the fraud they sold the business at a loss and recovered by way of
damages the difference between the original purchase price and the price
eventually realised on a resale, i.e. the old date of transaction rule was not
applied. In Banque Bruxelles Lambert S.A. v. Eagle Star Insurance Co.
Ltd. [1996] 3 WLR 87 your Lordships treated the measure of damages for
fraud as being in a special category regulated by the principles of Doyle v.
Olby (Ironmongers) Ltd. Turning for a moment away from damages for deceit,
the general rule in other areas of the law has been that damages are to be
assessed as at the date the wrong was committed. But recent decisions have
emphasised that this is only a general rule: where it is necessary in order
adequately to compensate the plaintiff for the damage suffered by reason of the
defendant's wrong a different date of assessment can be selected. Thus in the
law of contract, the date of breach rule "is not an absolute rule: if to follow
it would give rise to injustice, the court has power to fix such other date as
may be appropriate in the circumstances:" per Lord Wilberforce in
Johnson v. Agnew [1980] A.C. 367, at 401A. Similar flexibility applies in
assessing damages for conversion (I.B.L. Ltd. v. Coussens [1991] 2 All
E.R. 133) or for negligence (Dodd Properties Ltd. v. Canterbury City
Council [1980] 1 WLR 433). As Bingham L.J. (as he then was) said in
County Personnel (Employment Agency) Ltd. v. Alan R. Pulver & Co.
[1987] 1 W.L.R. 916, 925-926: In the light of these authorities the old 19th
century cases can no longer be treated as laying down a strict and inflexible
rule. In many cases, even in deceit, it will be appropriate to value the asset
acquired as at the transaction date if that truly reflects the value of what the
plaintiff has obtained. Thus, if the asset acquired is a readily marketable
asset and there is no special feature (such as a continuing misrepresentation or
the purchaser being locked into a business that he has acquired) the transaction
date rule may well produce a fair result. The plaintiff has acquired the asset
and what he does with it thereafter is entirely up to him, freed from any
continuing adverse impact of the defendant's wrongful act. The transaction date
rule has one manifest advantage, namely that it avoids any question of
causation. One of the difficulties of either valuing the asset at a later date
or treating the actual receipt on realisation as being the value obtained is
that difficult questions of causation are bound to arise. In the period between
the transaction date and the date of valuation or resale other factors will have
influenced the value or resale price of the asset. It was the desire to avoid
these difficulties of causation which led to the adoption of the transaction
date rule. But in cases where property has been acquired in reliance on a
fraudulent misrepresentation there are likely to be many cases where the general
rule has to be departed from in order to give adequate compensation for the
wrong done to the plaintiff, in particular where the fraud continues to
influence the conduct of the plaintiff after the transaction is complete or
where the result of the transaction induced by fraud is to lock the plaintiff
into continuing to hold the asset acquired. Finally, it must be emphasised that the principle in
Doyle v. Olby (Ironmongers) Ltd. [1969] 2 QB 158, strict though it is,
still requires the plaintiff to mitigate his loss once he is aware of the fraud.
So long as he is not aware of the fraud, no question of a duty to mitigate can
arise. But once the fraud has been discovered, if the plaintiff is not locked
into the asset and the fraud has ceased to operate on his mind, a failure to
take reasonable steps to sell the property may constitute a failure to mitigate
his loss requiring him to bring the value of the property into account as at the
date when he discovered the fraud or shortly thereafter. In sum, in my judgment the following principles apply
in assessing the damages payable where the plaintiff has been induced by a
fraudulent misrepresentation to buy property:
Before seeking to apply those principles to the
present case, there are two points I must make. First, in Downs v.
Chappell [1996] 3 All ER 344, 361, Hobhouse L.J. having quantified the
recoverable damage very much along the lines that I have suggested, sought to
cross-check his result by looking to see what the value of the business would
have been if the misrepresentations had been true and then comparing that value
to the contract price. Whilst Hobhouse L.J. accepted that this was not the
correct measure of damages, he was seeking to check that the plaintiff was not
being compensated for a general fall in market prices (for which the defendant
was not accountable) rather than for the wrong done to him by the defendant. In
my view, such a cross-check is not likely to be helpful and is conducive to
over-elaboration both in the evidence and in argument. Second, in Royscot
Trust Ltd. v. Rogerson [1991] 2 QB 297 the Doyle v. Olby (Ironmongers)
Ltd. measure of damages was adopted in assessing damages for innocent
misrepresentation under the Misrepresentation Act, 1967. I express no view on
the correctness of that decision. How then do those principles apply in the present
case? First, there is no doubt that the total loss incurred by Smith was caused
by the Roberts fraud, unless it can be said that Smith's own decision to retain
the shares until after the revelation of the Guerin fraud was a causative
factor. The Guerin fraud had been committed before Smith acquired the shares on
21 July 1989. Unknown to everybody, on that date the shares were already
pregnant with disaster. Accordingly when, pursuant to the Roberts fraud, Smith
acquired the Ferranti shares they were induced to purchase a flawed asset. This
is not a case of the difficult kind that can arise where the depreciation in the
asset acquired between the date of acquisition and the date of realisation may
be due to factors affecting the market which have occurred after the date of the
defendant's fraud. In the present case the loss was incurred by reason of the
purchasing of the shares which were pregnant with the loss and that purchase was
caused by the Roberts fraud. Can it then be said that the loss flowed not from
Smith's acquisition but from Smith's decision to retain the shares? In my
judgment it cannot. The judge found that the shares were acquired as a
market-making risk and at a price which Smith would only have paid for an
acquisition as a market-making risk. As such, Smith could not dispose of them on
21 July otherwise than at a loss. Smith were in a special sense locked into the
shares having bought them for a purpose and at a price which precluded them from
sensibly disposing of them. It was not alleged or found that Smith acted
unreasonably in retaining the shares for as long as they did or in realising
them in the manner in which they did. In the circumstances, it would not in my judgment
compensate Smith for the actual loss they have suffered (i.e. the difference
between the contract price and the resale price eventually realized) if Smith
were required to give credit for the shares having a value of 78p on 21 July
1989. Having acquired the shares at 82¼p for stock Smith could not commercially
have sold on that date at 78p. It is not realistic to treat Smith as having
received shares worth 78p each when in fact, in real life, they could not
commercially have sold or realised the shares at that price on that date. In my
judgment, this is one of those cases where to give full reparation to Smith, the
benefit which Smith ought to bring into account to be set against its loss for
the total purchase price paid should be the actual resale price achieved by
Smith when eventually the shares were sold. Finally I must mention a point raised by Mr.
Sumption, namely, that it is not open to Smith to argue before your Lordships
that the damages should be assessed in the manner which I have proposed. On the
pleadings, the damages claimed were the difference between the contract price
and either the "true" value on 21 July 1989 or their value when the fraud was
discovered. Mr. Sumption urged, in addition to the point on the pleadings, that
it would be unfair to Citibank to entertain the new argument since, if the point
had been pleaded Citibank would itself have pleaded and led evidence of a
failure by Smith to mitigate its loss and as to the reasonableness of Smith's
conduct. Although the pleading point is technically correct
(and could be cured by amendment) I am not satisfied that Citibank is prejudiced
by allowing this point to be argued before your Lordships. In opening his case
before the judge, Mr. Grabiner conceded that, in any event, he could not recover
more than Smith's actual realised loss. It could therefore have been an issue at
the trial, if Citibank had chosen to make it one, whether Smith should have sold
earlier or at a better price. Indeed, as I understand it, those matters were
investigated in that context at the trial and the judge found that Smith had
acted reasonably. In the circumstances, I can see no injustice to Citibank in
deciding this case on the new point raised before your Lordships. For these reasons I would hold that the damages
recoverable amount to £11,352,220 being the difference between the contract
price and the amount actually realised by Smith on the resale of the shares.
However, as there was no appeal by Smith against the judge's assessment of the
damages at £10,764,005, Smith's claim must be limited to that latter amount. I
would therefore allow the appeal and restore the judge's order.
LORD KEITH OF KINKEL
My Lords, For the reasons given in the speeches to be delivered
by my noble and learned friends, Lord Browne-Wilkinson and Lord Steyn, which I
have read in draft and with which I agree, I would allow the appeal, dismiss the
cross-appeal and restore the order of the trial judge as to damages.
LORD MUSTILL
My Lords, The speech to be delivered by my noble and learned
friend, Lord Steyn deals with both liability and damages. On the issue of
liability I gratefully adopt the analysis of law and fact, and agree that in
respect of the second and third occasions it has, but in respect of the first it
has not, been established that an actionable misrepresentation was made by
Citibank N.A. (acting through Mr. Roberts) to Smith New Court Securities Ltd. I
also agree that the conclusion regarding the first occasion, which differs from
that of the Court of Appeal, does not affect the liability of Citibank for
having induced Smith to enter into the purchase of Ferranti shares. On the question of damages I further agree that they
should be assessed on the basis of the difference between the contract price and
the amount actually realised by Smith on the resale, and would therefore allow
the appeal and restore the award of the trial judge on damages. On this aspect
of the dispute I wish, however, to add a very few words. Notwithstanding the
high authority of its source I cannot regard the judgment of Lord Denning M.R.
in Doyle v. Olby (Ironmongers) Ltd. [1969] 2 QB 158 as an invariable
guide to the assessment of damages for fraudulent misrepresentation. The appeal
in that case was not fully argued by counsel. The judgments were not reserved
and do not sit very easily together. To my mind the propositions which on the
argument of the present appeal were sought to be extracted from the decision
were painted with too broad a brush to deal accurately with all the problems
which may arise. True, the assessment of damages often involves so many
unquantifiable contingencies and unverifiable assumptions that in many cases
realism demands a rough and ready approach to the facts. True also that in a
case of fraud there are good reasons for departing in some respect from the
ordinary rules: and the irrelevance of foreseeability provides an example.
Nevertheless, there are instances where more is required in the way of analysis
than can be found in Doyle v. Olby (Ironmongers) Ltd., and this is one.
For my part, I would suggest that in the future when faced with situations such
as the present courts would do well to be guided by the seven propositions set
out by my noble and learned friend, Lord Browne-Wilkinson in the latter part of
his speech. The fourth and fifth of these are, I believe, amply sufficient to
show that the damages awarded by the judge ought to be upheld.
LORD SLYNN OF HADLEY
My Lords, I have had the advantage of reading the text of the
speech prepared by my noble and learned friends, Lord Browne-Wilkinson and Lord
Steyn. I agree that for the reasons they give the appeal of Smith New Court
Securities Ltd. should be allowed and that the order of Chadwick J. as to
damages be restored and that the cross-appeal on liability should be dismissed.
LORD STEYN
My Lords, There is an appeal and cross-appeal against the
judgment of the Court of Appeal dated 17 February 1994 to be considered. The
Court of Appeal upheld a judgment dated 25 March 1992 by Chadwick J. so far as
he concluded that the plaintiffs in an action in the Chancery Division had
established actionable fraudulent misrepresentations in respect of the sale of a
parcel of shares. Despite the fact that Chadwick J. had come to his conclusions
in a witness action the Court of Appeal held that he had misdirected himself on
one aspect of the issues of fact on liability. Accordingly the Court of Appeal
felt free to consider the case afresh without being rigidly bound by all the
judge's findings of fact. In the result the Court of Appeal affirmed the
judgment on liability of Chadwick J. on additional grounds. The correctness of
the Court of Appeal's decision on liability is the subject matter of the
cross-appeal. The arguments on the cross-appeal were addressed to issues of pure
fact. Moreover, in material respects the arguments of counsel for the
cross-appellant challenged concurrent findings of fact of the trial judge and
the Court of Appeal. By contrast the appeal challenges the decision of the
Court of Appeal on a question of principle, namely the correct measure of
damages in an action for deceit. The judge adopted a valuation method to assess
damages and held that the buyers were entitled to damages in a sum of the order
of £10.7m. In arriving at this conclusion the judge took into account a
subsequent fall in the value of the shares, which was caused by a pre-existing
and unconnected fraud which had been perpetrated on the company concerned. The
Court of Appeal ruled that as a matter of law the judge applied the wrong
measure of damages, and that the correct measure was the difference between the
price paid by the buyer and the price which, absent the misrepresentations, the
shares would have fetched on the open market on the acquisition date. It was
common ground that on that date the fraud perpetrated by the third party was not
known to the market. On this basis the Court of Appeal reduced the damages to
which the buyers were entitled to a sum of the order of £1.1m. My Lords, a detailed review of the testimonial
battleground at trial has left me in no doubt that the cross-appeal ought to be
dismissed. I will have to explain my reasons for this firm conclusion in some
detail. The helpful judgments of Chadwick J. and the Court of Appeal are now
respectively reported: [1992] B.C.L.C. 1104 and [1994] 1 W.L.R. 1271. It is
therefore possible to deal with the cross-appeal on liability somewhat more
economically than would otherwise have been the case. I will then turn to the
important question of law as to the correct legal measure of damages. I will
explain why I think that the appeal should be allowed and that the award of
damages made by Chadwick J. should be restored.
In July 1988 Citibank N.A., a company carrying on
business as a bank in London, made available a loan facility of £23m. to Parent
Industries Inc., a United States company. As security for the loan Parent
charged 28m. shares in Ferranti International Signal Inc. to Citibank. A Mr.
Guerin, a former director of Ferranti, was the beneficial owner of Parent. Mr.
Peck was Mr. Guerin's man at Parent and occupied the position of President. By
mid-July 1989 Parent was in default under the loan agreement. Citibank was
urgently considering the realisation of the security for its loan. In the phrase
often used at the trial it was a "forced sale" situation. On 21 July 1989 Citibank, acting through the brokers
Scrimgeour Vickers (Asset Management) Ltd., sold the 28m. Ferranti shares to
Smith New Court Securities Ltd. ("Smith") for about £23m., the price per share
being 82¼ p. Mr. Roberts, a senior employee of Citibank and director of
Scrimgeour, arranged the sale. In doing so he dealt with Mr. Lewis and Mr.
Abrahams, two directors of Smith and market makers by occupation. At the trial the case of Smith was that Mr. Roberts
induced Smith by fraudulent misrepresentations to buy the Ferranti shares. In
order to understand the nature of Smith's case it is necessary to explain the
vicissitudes of the value of shares in Ferranti. On 14 July 1989 Ferranti made a
preliminary announcement of its financial results for the year ended 31 March
1989. On the basis of that information the market value of the parcel of
Ferranti shares was probably of the order of 78p to 82p per share, i.e. a few
pence lower than the prices quoted on the Stock Exchange. Ferranti, Citibank and
Smith, as well as the individuals acting for these companies, and the market
generally, did not know that a massive fraud had been perpetrated on Ferranti.
In real terms the market price of the Ferranti shares on 21 July 1989 was a
fictitious price. There was a false market in Ferranti shares. The fact of the
fraud and its impact on the value of Ferranti shares only became known in
September 1989. By a letter of 29 September 1989 together with unaudited group
accounts the Chairman of the Board of Ferranti explained to shareholders that
the fraud had caused a reduction in the net worth of the Ferranti Group as at 31
March 1989 of approximately £170m. (from £370.8m. to £198.5m.) and a reduction
in profit for the year of approximately £18m. (from £29.3m. to £10.9m.). In
November 1989 Ferranti published the revised audited accounts for the year ended
31 March 1989. Those accounts confirmed the pessimistic predictions made in late
September. In these changed circumstances, and between 20 November 1989 and 30
April 1990, Smith disposed of the Ferranti shares by selling them in the market
in relatively small parcels at prices ranging from 49p per share to 30p per
share. The difference between the total price paid by Smith and the total of the
prices received was £11.3m. That brings me to the events of 21 July 1989 so far
as they are relevant to the alleged fraudulent misrepresentations. In order to
render the shape of the case intelligible it will be necessary to give a
chronological account of the sequence of events, with the rival contentions of
the parties as to the principal disputes interspersed. Shortly before 9.30 a.m.
on 21 July 1989 Mr. Roberts asked Mr. Lewis whether Smith would be interested in
buying the Ferranti shares. At 9.43 a.m. Mr. Lewis phoned Mr. Roberts. Mr.
Abrahams was also a party to the conversation. The discussion lasted 13 minutes.
Mr. Lewis confirmed that Smith was interested in purchasing the Ferranti shares.
Smith's case was that during the conversation Mr. Roberts said that Smith would
be in competition with two other bidders interested in buying the Ferranti
shares, namely a company in the Citicorp Group and another bidder not in the
securities industry. Mr. Roberts identified the first company as Citicorp
Scrimgeour Vickers Ltd. ("C.S.V."), a company carrying on business as
stockbrokers and market makers in London. This was the first alleged
representation. At trial Mr. Roberts said that he went no further than to say
that there were at least two other parties interested. There was in fact no
bidder for the Ferranti shares from outside the securities industry. The dispute
as to what was said in the 9.43 a.m. conversation was a major issue at the
trial. What was not in issue was that Mr. Lewis and Mr. Abrahams came to believe
that Smith would be in competition for the Ferranti shares with a bidder from
outside the securities industry. Following the 9.43 a.m. conversation, Mr. Abrahams
and Mr. Lewis attended a meeting with other employees of Smith to discuss
whether Smith should bid for the Ferranti shares and, if so, at what price. Mr.
Lewis and Mr. Abrahams told those present at the meeting that Smith would be
bidding in competition against C.S.V. and one other bidder from outside the
securities industry. The decision taken at the meeting was that Smith should bid
82p per share. The reasoning that led to this decision is of some relevance. The
facts are common ground. Smith had a choice. It could have bought the shares as
a "bought deal" or as a market making risk. The first would have involved Smith
buying the Ferranti shares and selling them through Smith's agency arm, at a
profit, within a matter of hours to institutional clients. In a transaction of
the magnitude of buying 28m. shares in Ferranti it would have been normal for
Smith to do a bought deal. Instead Smith chose to do a transaction of the second
type. This involved buying the shares with a view to holding them as a market
making risk and only selling them as and when the opportunity or opportunities
to do so might arise. Smith took the view that the Ferranti shares could not be
sold to institutional clients at a price above 80p per share without a
recommendation to clients, which Smith's agency arm was not prepared to give. In
order to do a bought deal Smith would have had to buy the Ferranti shares at
below 80p. If Smith had not believed that it was in competition with a bidder
from outside the securities industry, it would have bid for the shares at a
price consistent with doing a bought deal at a profit. That price would have
been 78p per share. It was agreed that if Smith had bid 78p per share, the bid
would not have been accepted by Citibank. In the presence of Mr. Abrahams, Mr. Lewis telephoned
Mr. Roberts at 10.42 a.m. This call lasted about two minutes. It was made some
20 minutes after the conclusion of the pricing meeting. At the trial Mr. Lewis
and Mr. Abrahams testified that Mr. Lewis told Mr. Roberts that Smith had
decided to bid for the Ferranti shares; that Mr. Lewis asked him to attend at
Smith's offices so that Smith could make the bid in person; and that Mr. Lewis
asked Mr. Roberts to bring with him the other two bids in sealed envelopes to
Smith's offices. Mr. Roberts agreed that Mr. Lewis asked him to come to Smith's
offices to hear the bid. But Mr. Roberts denied that anything else was said
about bringing the other bids in sealed envelopes. Mr. Roberts arrived at the offices of Smith shortly
after noon. A meeting then took place between Mr. Roberts and three employees of
Smith, namely Mr. Lewis, Mr. Abrahams and Mr. Marks. Mr. Marks had been present
at the pricing meeting. It is common ground that Mr. Lewis said that Smith would
bid 82p per share. Mr. Roberts did not have authority to accept the bid but he
said that he would recommend the bid. What is in dispute is the rest of the
conversation. Mr. Lewis said that Mr. Roberts said at the start of the meeting
that he would disclose the competing bids after Smith had made its bid. This was
called the second representation. Mr. Lewis, Mr. Abrahams and Mr. Marks said
that after Mr. Lewis made the bid at 82p Mr. Roberts said that Aeritalia (an
Italian company) had bid 81p for the shares and C.S.V. had bid 75-77p. This was
called the third representation. Mr. Roberts said that he made no mention of
bids: he said that he said that Aeritalia and C.S.V. had given indications in
the 81p and 75-77p regions. Neither Aeritalia nor C.S.V. had made any bid. It
was conceded that if the second and third representations had been made, they
would have been fraudulently made. Mr. Roberts returned to his office and told the
decision-makers at Citibank about the bid. While the bid had formally lapsed
because it was not immediately accepted Smith remained a willing buyer of the
Ferranti shares at 82p per share throughout the afternoon. Shortly after 5.00
p.m. on the same day the bargain was struck. It was done in a telephone
conversation between Mr. Lewis and Mr. Abrahams, on the Smith side, and Mr.
Fisher, a director and senior dealer at Scrimgeour. The main reason for the
additional ¼p was to establish that the contract was made after trading hours on
Friday 21 July, so that it would not have to be reported under Stock Exchange
rules until the following business day. The rest of the story can be taken quite briefly.
After the suspension of Ferranti shares in September 1989, Smith started to
investigate the circumstances in which it had purchased the Ferranti shares.
Smith discovered that Aeritalia had never bid for the Ferranti shares. That
discovery led to the institution of the proceedings in January 1990.
The trial and the judgment of Chadwick J. on liability [1992] B.C.L.C. 1104
The trial took place between 25 November 1991 and 17
January 1992. The judge gave judgment on 25 March 1992. He found that in advance
of earlier criminal proceedings against Mr. Roberts Serious Fraud Office
officials had asked Mr. Lewis and Mr. Abrahams to pool their recollections; that
they falsely denied this at the criminal trial; and that in the civil trial they
falsely pretended that they had forgotten how their statements came into
existence. In the result the judge found that the first representation, which
depended exclusively on the evidence of Mr. Lewis and Mr. Abrahams, had not been
proved. But, in the light of the totality of the evidence before him, the judge
found that Mr. Roberts had made the second and third representations on behalf
of Citibank; that those representations were false; and that Smith had been
induced to enter into the contract by those fraudulent misrepresentations. The appeal and the judgment of the Court of Appeal [1994] 1 W.L.R. 1271
Citibank appealed against the judge's findings on
liability. Smith served a respondent's notice which invited the Court of Appeal
to uphold the judge's conclusions on liability on additional grounds. And that
is what the Court of Appeal did. The Court of Appeal held that the judge had
misdirected himself in respect of the 9.43 a.m. conversation by considering the
credibility and reliability of Mr. Lewis and Mr. Abrahams in isolation. After a
review of all the evidence the Court of Appeal found, as a matter of fact, that
all three representations were made and made fraudulently and that they induced
Smith to enter into the contract. In the result the Court of Appeal dismissed
Citibank's appeal on liability. Counsel for Citibank put in the forefront of his
submissions the undisputed proposition that while as a matter of law fraud only
has to be proved to the civil standard, proof to that standard must necessarily
take into account the consideration that the more serious the allegation is, the
greater the proof is needed to persuade a court that it can be satisfied that
the allegation is established. In other words, the very gravity of an allegation
of fraud is a circumstance which has to be weighed in the scale in deciding as
to the balance of probabilities: In re H. (Minors) (Sexual Abuse: Standard of
Proof) [1996] AC 563, 586C--587F, per Lord Nicholls of Birkenhead.
But counsel accepted that both Chadwick J. and the Court of Appeal correctly
directed themselves in accordance with this standard. Counsel for Citibank reviewed the minutiae of the
evidence. He highlighted undoubted inconsistencies between the accounts of Mr.
Lewis and Mr. Abrahams. He argued that there were improbabilities inherent in
their accounts. But throughout his speech there was the theme that since
Chadwick J. found on proper grounds that Mr. Lewis and Mr. Abrahams had lied it
is impossible to sort out in their evidence truth from falsehood. That is an
argument worthy of careful consideration. It has rightly been said that a
cocktail of truth, falsity and evasion is a more powerful instrument of
deception that undiluted falsehood. It is also difficult to detect. But counsel
had to face the fact that on the third representation Mr. Marks supported the
accounts of Mr. Lewis and Mr. Abrahams. And at the trial counsel never
challenged the credibility of Mr. Marks. Counsel for Citibank put the matter
quite simply: he said Mr. Marks' evidence was too thin a thread to bear the
weight of an elaborate case of fraud. Moreover, counsel argued that the Court of
Appeal was not entitled to substitute their view for that of the judge on the
first representation. Once it was accepted that the first representation had not
been proved he said that it was simply impossible to be satisfied that the
second and third representations were made. In the broadest outline these were
the principal submissions of counsel for Citibank. The approach to an attack on concurrent findings of fact
The principle is well settled that where there has
been no misdirection on an issue of fact by the trial judge the presumption is
that his conclusion on issues of fact is correct. The Court of Appeal will only
reverse the trial judge on an issue of fact when it is convinced that his view
is wrong. In such a case, if the Court of Appeal is left in doubt as to the
correctness of the conclusion, it will not disturb it. That is the first
difficulty in the way of upholding the arguments of counsel for Citibank. But
there is an additional obstacle. The Court of Appeal upheld the findings of fact
of the trial judge on the actionability of the second and third representations.
While the jurisdiction of the House is not in doubt, it is most reluctant to
disturb concurrent findings of fact. There are two reasons for this approach.
First, the prime function of the House of Lords is to review questions of law of
general public importance. That function it cannot properly discharge if it
often has to hear appeals on pure fact. This point is underlined by the fact
that, despite the economy of presentation of counsel, the hearing on liability
lasted more than three days. Secondly, in the case of concurrent findings of
fact, the House is confronted with the combined views of the first instance
judge and the Court of Appeal. A suggestion that the House can be expected to
take a different view on concurrent findings of fact generally gives rise
to an initial sense of disbelief. Nevertheless, I must examine the merits of the
argument of counsel for Citibank. It seems to me that there are five principal reasons
why the attack on the concurrent findings of fact must fail. First, having found
that Mr. Lewis and Mr. Abrahams had lied on a collateral matter, the judge
approached their evidence with great caution. Rightly, he rejected the notion
that falsity in one thing involves falsity in all. Reviewing their accounts as
to the second and third representations against the whole body of evidence he
accepted, as he was entitled to do, their accounts. Secondly, the judge was
plainly considerably influenced by the fact that on the third representation Mr.
Marks in all material respects supported Mr. Lewis and Mr. Abrahams. He accepted
the evidence of Mr. Marks. Thirdly, it is not in dispute that between 10.00 and
10.30 a.m. on the morning of 21 July 1989, at the pricing meeting, which was
attended by Mr. Lewis, Mr. Abrahams and Mr. Marks, Smith fixed their bid at 82p
on the footing that they would be bidding in competition with two other bidders,
one of whom was from outside the securities industry. This fact strongly
supported Smith's case. Fourthly, while disputed by counsel for Citibank, it
seems to me inescapable that on Citibank's theory of the case, Mr. Lewis and Mr.
Abrahams fabricated the story that they had been told that there were other
bidders and the price of the bids several months before the issue of
misrepresentation arose. There is the undisputed evidence of Mr. Smith, another
employee of Smith, that the account of the rival bids surfaced on 21 July 1989,
i.e. the day of the transaction. Given this fact, and Mr. Marks' evidence, the
theory of a fabrication is absurd. Fifthly, as against these factors, the judge
had to weigh the evidence of Mr. Roberts. The judge rejected Mr. Roberts'
evidence. That necessarily involved a finding that Mr. Roberts gave untruthful
evidence. The judge was entitled to take this course. Taking into account
counsel's submissions I have reviewed the whole of the evidence of Mr. Roberts,
given over more than two days. He was a most unimpressive witness. He testified
that at the midday meeting he had said that Aeritalia had given an indication
(shorthand for saying they were interested parties) at 81p. It is perfectly
clear, however, that Aeritalia was only interested in an option to buy the
Ferranti shares for two months. The sale of the shares was, however, a matter of
urgency and both Citibank and Parent, acting through Mr. Peck, wanted an
outright sale. Mr. Roberts said that he had been told by another Citibank
employee that Mr. Peck had said that Aeritalia might make an outright bid. In
Mr. Roberts' own words that was "a zero possibility" by midday on 21 July 1989.
Cumulatively, these five factors are sufficient in the particular circumstances
of this case to demonstrate convincingly that the attack on the concurrent
findings of Chadwick J. and the Court of Appeal must be rejected. In sustaining
the second and third representations as actionable fraudulent misrepresentations
Chadwick J. in my judgment came to a correct conclusion. So far as the Court of
Appeal affirmed the findings of Chadwick J. I am in respectful agreement with
their concurrent views. The Court of Appeal's views on the facts
It is now necessary to consider the exceptional
course taken by the Court of Appeal regarding the first representation. It will
be recollected that the judge did not find the first representation proved but
he did find the second and third representations proved. The clue to this
conclusion is to be found in the following passage in the judgment at first
instance [1992] B.C.L.C. 1104, 1116C: The Court of Appeal concluded that the judge erred by
not subsequently reviewing this conclusion in the light of all the evidence.
Counsel for Citibank vigorously challenged the conclusion of the Court of
Appeal. It is necessary to analyse the position on a step by step basis. In making findings of credibility and reliability it
is unsafe for a trial judge to compartmentalise the case. In Attorney-General
of Hong Kong v. Wong Muk Ping [1987] A.C. 501, 510, Lord Bridge of Harwich
explained: In other words, an initial and provisional conclusion
that a witness is not credible on a particular point may be falsified when
considered against the possibilities, probabilities and certainties emerging
from the whole body of evidence before the court. That is the error into which
the judge fell. He ought to have reconsidered his understandable unwillingness
to act on the unsupported evidence of Mr. Lewis and Mr. Abrahams in respect of
the first representation in the light of the evidence about the pricing meeting,
Mr. Marks' account and the inherent probabilities. There is no internal
indication in his judgment that he ever did so. It follows that the Court of Appeal was entitled to
conclude that in respect of the first representation the trial judge misdirected
himself. That meant that the Court of Appeal was at large to disregard the
judge's findings of fact, even though based on credibility. I understood counsel
for Citibank at one stage to suggest that this vitiates all the judge's findings
of fact and the whole case on fraud collapses. That is quite unrealistic. The
impact of a misdirection is not governed by fixed rules. The appropriate course
is dictated by considerations of common sense and fairness as well as close
attention to the nature of the misdirection and the circumstances of the
particular case. Here the Court of Appeal was fully entitled to take the view
that the misdirection only vitiated the judge's findings on the first
representation. In all other respects the Court of Appeal was entitled to act on
the judge's findings so far as they were unaffected by the misdirection. On the first representation the Court of Appeal was
entitled to come to its own conclusion. The principal reasons for the conclusion
of the Court of Appeal were spelt out as follows [1994] 1 W.L.R. 1271, 1279:
In effect the Court of Appeal held that on the first
representation the judge should in all the circumstances also have accepted the
evidence of Mr. Lewis and Mr. Abrahams, and rejected the evidence of Mr.
Roberts. To this extent I respectfully agree with the admittedly exceptional
course taken by the Court of Appeal. That is, however, not the end of the matter. On the
first representation, counsel for Citibank was able to demonstrate that, even on
an acceptance of the evidence of Mr. Lewis and Mr. Abrahams, there was
considerable scope for misunderstanding between the participants in the 9.43
a.m. telephone conversation. In the discussions at 10.42 a.m. and at midday Mr.
Lewis and Mr. Abrahams on their evidence (and the evidence of Mr. Marks)
unambiguously spoke of actual bids. But Mr. Lewis and Mr. Abrahams were less
clear about the discussion at 9.43 a.m.: they both said that Mr. Roberts either
spoke of bids or about bids to be made. Counsel for Smith argued that Mr.
Roberts impliedly represented that he had bona fide and reasonable
grounds for saying that bids would be made that day and that he had no such
grounds. There is force in this argument. But on any view that is a far less
clear-cut position than existed in respect of the second and third
representation. That brings me back to another passage in the judgment at first
instance. The judge said [1992] B.C.L.C. 1104, at 1129C: Making due allowance for the judge's earlier
misdirection, I attach weight to this passage. On balance I too am not persuaded
that the evidence of Mr. Lewis and Mr. Abrahams established the first
representation in clear enough terms sufficient to justify a finding of deceit.
Differing from the Court of Appeal on the interpretation of the evidence of Mr.
Lewis and Mr. Abrahams, I would hold that in respect of the 9.43 a.m.
conversation an actionable fraudulent misrepresentation has not been
established. Conclusion on cross-appeal
In my view the conclusion that the actionability of
the first representation has not been established does not affect the outcome of
this appeal. The misrepresentations at the midday meeting on 21 July 1989
induced Smith to enter into the transaction shortly after 5 O'clock on that day.
After all, the trial judge found on ample evidence (including that of Mr. Marks)
that Smith would have withdrawn from the transaction if these misrepresentations
had not been made. The Court of Appeal agreed with this conclusion. So do I. The
essentials of the tort of deceit were established. I would dismiss the
cross-appeal on liability.
Given the fact that the subsequent dramatic fall in
the value of Ferranti shares was caused by the disclosure of an earlier fraud
practised on Ferranti by a third party the question is whether Smith is entitled
to recover against Citibank the entire loss arising from the fraudulently
induced transaction. Smith submits that the Court of Appeal adopted the wrong
measure. Smith seeks to recover damages calculated on the basis of the price
paid less the aggregate of subsequent realisations. Citibank contends that the
loss attributable to the subsequent disclosure of the fraud by a third party is
a misfortune risk and is irrecoverable. Citibank argues that the Court of Appeal
adopted the correct measure. Horses and shares
The fraud perpetrated by Mr. Roberts on Smith related
to shares quoted on the Stock Exchange. Undoubtedly, the legal measure of
damages in an action in deceit when applied to transactions in shares may throw
up special problems. It is not simply a matter of the perception of the market
as to the value of the shares. If loss is to be determined by way of the price
paid less a valuation of the shares at a given date, the determination of the
real or true value of the shares, absent the deceit forming the basis of the
claim, may give rise to difficult hypothetical problems. Even more difficult
problems arise if it is alleged that for extrinsic reasons there has been a
false market, e.g. because investors have been misled by widespread false
statements about the value of the stock of the company. None of these practical
considerations justify the adoption of a special rule in respect of share
transactions. The same legal principle must govern sales of shares, goods, a
business or land. It is therefore possible to simplify the problem. The example
given by Cockburn C.J. in Twycross v. Grant (1877) 2 C.P.D. 469 is
instructive. He said, at pp. 544-545: Counsel for Citibank argued that Cockburn C.J. erred
in saying that if the horse had some latent disease at the time of the
transaction the buyer may claim the entire price he paid. He argued that in such
a case there was no sufficient causal link between the latent disease and the
eventual death of the horse. Counsel for Smith argued that the transaction,
which was induced by deceit, directly led to the loss of the entire value of the
horse. On any view it is clear that, if Cockburn C.J. is right, the law imposes
liability in an action for deceit for some consequences that were unforeseen and
unforeseeable when the tortfeasor committed the wrong. And if that is right it
may tell us something about the correct disposal of the present case. That brings me to the question of policy whether
there is a justification for differentiating between the extent of liability for
civil wrongs depending on where in the sliding scale from strict liability to
intentional wrongdoing the particular civil wrong fits in. It may be said that
logical symmetry and a policy of not punishing intentional wrongdoers by civil
remedies favour a uniform rule. On the other hand, it is a rational and
defensible strategy to impose wider liability on an intentional wrongdoer. As
Hart and Honoré, Causation in the Law, 2nd ed. (1985), p. 304
observed, an innocent plaintiff may, not without reason, call on a morally
reprehensible defendant to pay the whole of the loss he caused. The exclusion of
heads of loss in the law of negligence, which reflects considerations of legal
policy, does not necessarily avail the intentional wrongdoer. Such a policy of
imposing more stringent remedies on an intentional wrongdoer serves two
purposes. First it serves a deterrent purpose in discouraging fraud. Counsel for
Citibank argued that the sole purpose of the law of tort generally, and the tort
of deceit in particular, should be to compensate the victims of civil wrongs.
That is far too narrow a view. Professor Glanville Williams identified four
possible purposes of an action for damages in tort: appeasement, justice,
deterrence and compensation: (1951) 4 Current Legal Problems 137. He concluded,
at p. 172: And in the battle against fraud civil remedies can
play a useful and beneficial role. Secondly, as between the fraudster and the
innocent party, moral considerations militate in favour of requiring the
fraudster to bear the risk of misfortunes directly caused by his fraud. I make
no apology for referring to moral considerations. The law and morality are
inextricably interwoven. To a large extent the law is simply formulated and
declared morality. And, as Oliver Wendell Holmes, The Common Law
(edited by M. De W. Howe), (1968), p. 106, observed, the very notion of deceit
with its overtones of wickedness is drawn from the moral world. The old cases
For more than a hundred years at least English law
has adopted a policy of imposing more extensive liability on intentional
wrongdoers than on merely careless defendants. This policy was trenchantly spelt
out by Lord Blackburn in Livingstone v. Rawyards Coal Co. (1880) 5
App.Cas. 25. He said, at p. 39: Since Victorian times there have been great
developments in our law of obligations. But there has been no retreat from the
policy spelt out by Lord Blackburn. On the other hand, the way in which the law
can distinguish between the intentional wrongdoer and a man who caused loss by a
foolish but honest mistake was not worked out clearly in the old cases.
Pasley v. Freeman, decided more than 200 years ago, marks the emergence
of the tort of deceit: (1789) 3 Durn. & E. 51. In cases framed in deceit the
measure of damages was held to involve ascertainment of the "real" or "face"
value of the shares at the time of allotment or purchase. See Davidson v.
Tullock (1860) 36 L.T. 97; Peek v. Derry (1887) 37 ChD 541;
reversed on liability (1889) 14 AppCas 337; Arkwright v. Newbold (1881)
17 Ch.D. 301, reversed on liability, 17 Ch.D. 313; Broome v. Speak [1903] 1 Ch 586, (affirmed Shepheard v. Broome [1904] AC 342). Except for
some useful general observations on valuation as a method of measuring loss, and
the explanation of the enquiry into a past hypothetical event in the sense of
the valuation of shares absent the fraud, I do not think those cases help much.
And, except for the obiter dictum of Cockburn C.J. in Twycross v. Grant,
C.P.D. 469, 544, the earlier cases do not touch on the problems in the present
case. Finally, even in the last century it was realised that there must be
sensible and practical limits to the heads of loss for which even an intentional
wrongdoer can be held liable. Thus in Twycross v. Grant Cockburn C.J.
said that if the fraudulently misdescribed horse subsequently catches a disease
and dies the buyer cannot claim the entire value of the horse. But it took a
long time before the precise nature of those limitations were clearly understood
and explained. Doyle v. Olby (Ironmongers) Ltd.[1969] 2 QB 158
Eventually, the idea took root that an intentional
wrongdoer is not entitled to the benefit of the reasonable foreseeability test
of remoteness. He is to be held liable in respect of "the actual damage directly
flowing from the fraudulent inducement:" see the obiter dictum of Lord Atkin in
Clark v. Urquhart [1930] A.C. 28, 68: and compare dicta of Dixon J. in
Potts v. Miller (1940) 64 C.L.R.
282, 298-299, and in Toteff v. Antonas (1952) 87 C.L.R.
647, 650. It was, however, not until the decision of the Court of Appeal
in Doyle v. Olby (Ironmongers) Ltd. that the governing principles were
clearly laid down. By fraudulent misrepresentation the defendant induced the
plaintiff to buy a business. The trial judge awarded damages to the plaintiff on
the basis of a contractual measure of damages, i.e. the cost of making good the
representations. The Court of Appeal ruled that this was an error and
substituted a higher figure assessed on the basis of the tort measure, i.e.
restoration of the status quo ante. Lord Denning M.R. explained, at p. 167:
Winn and Sachs L.JJ. expressed themselves in similar terms. The logic of the decision in Doyle v. Olby
(Ironmongers) Ltd. justifies the following propositions: (1) The plaintiff
in an action for deceit is not entitled to be compensated in accordance with the
contractual measure of damage, i.e. the benefit of the bargain measure. He is
not entitled to be protected in respect of his positive interest in the bargain.
(2) The plaintiff in an action for deceit is, however, entitled to be
compensated in respect of his negative interest. The aim is to put the plaintiff
into the position he would have been in if no false representation had been
made. (3) The practical difference between the two measures was lucidly
explained in a contemporary case note on Doyle v. Olby (Ironmongers)
Ltd.: Treitel, "Damages for Deceit," (1969) 32 M.L.R. 556, 558-559.
The author said: (4) Concentrating on the tort measure, the remoteness
test whether the loss was reasonably foreseeable had been authoritatively laid
down in The Wagon Mound in respect of the tort of negligence a few years
before Doyle v. Olby (Ironmongers) Ltd. was decided: Overseas Tankship
(U.K.) Ltd. v. Morts Dock & Engineering Co. Ltd. (The Wagon Mound)
[1961] AC 388. Doyle v. Olby (Ironmongers) Ltd. settled that a wider
test applies in an action for deceit. (5) The dicta in all three judgments, as
well as the actual calculation of damages in Doyle v. Olby (Ironmongers)
Ltd., make clear that the victim of the fraud is entitled to compensation
for all the actual loss directly flowing from the transaction induced by the
wrongdoer. That includes heads of consequential loss. (6) Significantly in the
present context the rule in the previous paragraph is not tied to any process of
valuation at the date of the transaction. It is squarely based on the overriding
compensatory principle, widened in view of the fraud to cover all direct
consequences. The legal measure is to compare the position of the plaintiff as
it was before the fraudulent statement was made to him with his position as it
became as a result of his reliance on the fraudulent statement. Doyle v. Olby (Ironmongers) Ltd. was
subsequently applied by the Court of Appeal in two Court of Appeal decisions:
East v. Maurer [1991] 1 WLR 461 and Smith Kline & French
Laboratories Ltd. v. Long [1989] 1 W.L.R. 1. East v. Maurer is of
some significance since it throws light on a point which arose in argument.
Counsel for Citibank argued that in the case of a fraudulently induced sale of a
business, loss of profits is only recoverable on the basis of the contractual
measure and never on the basis of the tort measure applicable to fraud. This is
an oversimplification. The plaintiff is not entitled to demand that the
defendant must pay to him the profits of the business as represented. On the
other hand, East v. Maurer shows that an award based on the hypothetical
profitable business in which the plaintiff would have engaged but for deceit is
permissible: it is classic consequential loss. Turning to the Smith Kline
case it has been suggested that the Doyle v. Olby (Ironmongers) Ltd. rule
was wrongly applied: Burrows, Remedies for Torts and Breach of
Contract, 2nd ed. (1994), pp. 173-174. The correctness of that comment I
need not examine. In my view it is sufficient to say that the principles
emerging from Doyle v. Olby (Ironmongers) Ltd. are good law.
At the risk of being side-tracked I must now refer to
two Court of Appeal decisions which were discussed in argument. In Royscot
Trust Ltd. v. Rogerson [1991] 2 QB 297 the Court of Appeal held that under
section 2(1) of the Misrepresentation Act 1967 damages in respect of an honest
but careless representation are to be calculated as if the representation had
been made fraudulently. The question is whether the rather loose wording of the
statute compels the court to treat a person who was morally innocent as if he
was guilty of fraud when it comes to the measure of damages. There has been
trenchant academic criticism of the Royscot case: see Richard Hooley,
"Damages and the Misrepresentation Act 1967" (1991) 107 L.Q.R. 547-551. Since
this point does not directly arise in the present case, I express no concluded
view on the correctness of the decision in the Royscot case. The second
case is the decision of the Court of Appeal in Downs v. Chappell [1996] 3 All ER 344. The context is the rule that in an action for deceit the plaintiff
is entitled to recover all his loss directly flowing from the fraudulently
induced transaction. In the case of a negligent misrepresentation the
rule is narrower: the recoverable loss does not extend beyond the consequences
flowing from the negligent misrepresentation: see Banque Bruxelles
Lambert S.A. v. Eagle Star Insurance Co. Ltd. [1996] 3 WLR 87. In
Downs v. Chappell [1996] 3 All ER 344, 361, Hobhouse L.J. applied this
narrower rule to an action for deceit. He enunciated the following
"qualification" of the conventional rule [361h]: That led Hobhouse L.J. "to compare the loss
consequent upon entering into the transaction with what would have been the
position had the represented, or supposed, state of affairs existed:" at p.
362a. The correctness of this proposition in a case of deceit was debated at the
bar. Counsel for Citibank in whose interest it was to adopt this proposition
felt some difficulty in doing so. In my view the orthodox and settled rule that
the plaintiff is entitled to all losses directly flowing from the transaction
caused by the deceit does not require a revision. In other words, it is not
necessary in an action for deceit for the judge, after he had ascertained the
loss directly flowing from the victim having entered into the transaction, to
embark on a hypothetical reconstruction of what the parties would have agreed
had the deceit not occurred. The rule in deceit is justified by the grounds
already discussed. I would hold that on this point Downs v. Chappell was
wrongly decided. The date if transaction rule
That brings me to the perceived difficulty caused by
the date of transaction rule. The Court of Appeal referred to the rigidity of
"the rule in Waddell v. Blockey (1879) 4 Q.B.D. 678, which requires the
damages to be calculated as at the date of sale" [1994] 1 W.L.R. 1271, 1283G. No
doubt this view was influenced by the shape of arguments before the Court of
Appeal which treated the central issue as being in reality a valuation exercise.
It is right that the normal method of calculating the loss caused by the deceit
is the price paid less the real value of the subject-matter of the sale. To the
extent that this method is adopted, the selection of a date of valuation is
necessary. And generally the date of the transaction would be a practical and
just date to adopt. But it is not always so. It is only prima facie the right
date. It may be appropriate to select a later date. That follows from the fact
that the valuation method is only a means of trying to give effect to the
overriding compensatory rule: Potts v. Miller, 64 C.L.R.
282, 299, per Dixon J.; and County Personnel (Employment
Agency) Ltd. v. Alan R. Pulver & Co. [1987] 1 W.L.R. 916, 925-926,
per Bingham L.J. Moreover, and more importantly, the date of transaction
rule is simply a second order rule applicable only where the valuation method is
employed. If that method is inapposite, the court is entitled simply to assess
the loss flowing directly from the transaction without any reference to the date
of transaction or indeed any particular date. Such a course will be appropriate
whenever the overriding compensatory rule requires it. An example of such a case
is to be found in Cemp Properties (U.K.) Ltd. v. Dentsply Research &
Development Corporation [1991] 2 E.G.L.R. 197, 201, per Bingham L.J.
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 defendants. The analogy of
the assessment of damages in a contractual claim on the basis of cost of cure or
difference in value springs to mind. In Ruxley Electronics and Construction
Ltd. v. Forsyth [1996] AC 344, 360G, Lord Mustill said: "There are not two
alternative measures of damages, as opposite poles, but only one; namely, the
loss truly suffered by the promisee." In an action for deceit the price paid
less the valuation at the transaction date is simply a method of measuring loss
which will satisfactorily solve many cases. It is not a substitute for the
single legal measure: it is an application of it. Causation
So far I have discussed in general terms the scope of
a fraudster's liability in accordance with the rule identified with Doyle v.
Olby (Ironmongers) Ltd. [1969] 2 QB 158. It is now necessary to consider
separately the three limiting principles which, even in a case of deceit, serve
to keep wrongdoers' liability within practical and sensible limits. The three
concepts are causation, remoteness and mitigation. In practice the inquiries
under these headings overlap. But they are distinct legal concepts. For present
purposes causation is the most important. The major issue in the present case is
whether there is a causal link between the fraud and the loss arising by reason
of the pre-existing fraud perpetrated on Ferranti. How should this matter be
approached? The development of a single satisfactory theory of causation has
taxed great academic minds.: see Hart and Honoré, Causation in the Law,
2nd ed. (1985) and Honoré, "Necessary and Sufficient Conditions in Tort Law," in
Owen, Philosophical Foundations of Tort Law, (1995), p. 363. But, as yet,
it seems to me that no satisfactory theory capable of solving the infinite
variety of practical problems has been found. Our case law yields few secure
footholds. But it is settled that at any rate in the law of obligations
causation is to be categorised as an issue of fact. What has further been
established is that the "but for" test, although it often yields the right
answer, does not always do so. That has led judges to apply the pragmatic test
whether the condition in question was a substantial factor in producing the
result. On other occasions judges assert that the guiding criterion is whether
in common sense terms there is a sufficient causal connection: see Yorkshire
Dale Steamship Co. Ltd. v. Minister of War Transport [1942] A.C. 691, 706,
per Lord Wright. There is no material difference between these two
approaches. While acknowledging that this hardly amounts to an intellectually
satisfying theory of causation, that is how I must approach the question of
causation. The second limiting principle is remoteness. I have
already discussed the special rule of remoteness developed by the courts in the
context of deceit. This requirement is in issue in the present case: if there is
a sufficient causal link it must still be shown that the entire loss suffered by
Smith is a direct consequence of the fraudulently induced transaction. The third
limiting principle is the duty to mitigate. The plaintiff is not entitled to
damages in respect of loss which he could reasonably have avoided. This limiting
principle has no special features in the context of deceit. There is no issue
under this heading and I need say no more about it. Taking stock
It is now necessary to take stock of the case. The
distinctive features of the case are-- (1) that the fraud of Mr. Roberts induced Smith
to buy the Ferranti shares, the value of which were already at the date of sale
doomed to collapse due to the fraud practised on the company by a third party;
and (2) that by reason of the fraud of Mr. Roberts,
Smith was induced to buy the shares as a market making risk, i.e. to hold on to
the shares for sale at a later stage. In these circumstances Smith was truly locked into
the transaction by reason of the fraud perpetrated on it. And the causative
influence of the fraud is not significantly attenuated or diluted by other
causative factors acting simultaneously with or subsequent to the fraud. The
position would have been different if the loss suffered by Smith arose from a
subsequent fraud. That would be a case like the misrepresented horse in Cockburn
C.J.'s example in Twycross v. Grant, 2 C.P.D. 469, 544-545, where the
buyer plainly cannot recover the entire value of the horse if it subsequently
catches a disease and dies. In the actual circumstances of this case I am
satisfied that there was a sufficient causal link between the fraud and Smith's
loss. Moreover, for substantially the same reasons, I would hold that Smith's
losses, calculated on the basis of the difference between the price paid and the
proceeds of subsequent realisations, flow directly from the fraud. In my view
Smith would on this basis be entitled to recover the sum of about £11.3m. Smith
merely seeks restoration of the order for payment of £10,764,005 which Chadwick
J. made on a different basis. In law Smith are entitled to succeed on this
appeal to that extent. Conclusion
I have not lost sight of counsel for Citibank's
argument that, given the way the case was pleaded, Smith should not be allowed
to succeed on this legal basis. In my view the argument that Citibank was
prejudiced is quite unreal. I reject it. I would allow Smith's appeal on damages and restore
the order of Chadwick J.
"I do not think there is any difference of opinion as to its being a
general rule that, where any injury is to be compensated by damages, in
settling the sum of money to be given for reparation of damages you should as
nearly as possible get that sum of money which will put the party who has been
injured, or who has suffered, in the same position as he would have been in if
he had not sustained the wrong for which he is now getting his compensation or
reparation."
"That must be qualified by a great many things which may
arise--such, for instance, as by the consideration whether the damage has been
maliciously done, or whether it has been done with full knowledge that the
person doing it was doing wrong. There could be no doubt that there you would
say that everything would be taken into view that would go most against the
wilful wrongdoer--many things which you would properly allow in favour of an
innocent mistaken trespasser would be disallowed as against a wilful and
intentional trespasser on the ground that he must not qualify his own wrong,
and various things of that sort."
"I find it difficult to suppose that there is any difference in the
measure of damages in an action of deceit depending upon the nature of the
transaction into which the plaintiff is fraudulently induced to enter. Whether
he buys shares or buys sugar, whether he subscribes for shares, or agrees to
enter into a partnership, or in any other way alters his position to his
detriment, in principle, the measure of damages should be the same, and
whether estimated by a jury or a judge. I should have thought it would be
based on the actual damage directly flowing from the fraudulent inducement.
The formula in McConnel v. Wright may be correct or it may be expressed
in too rigid terms. I reserve the right to consider it if it should ever be in
issue in this House."
"On principle the distinction seems to be this: in contract, the
defendant has made a promise and broken it. The object of damages is to put
the plaintiff in as good a position, as far as money can do it, as if the
promise had been performed. In fraud, the defendant has been guilty of a
deliberate wrong by inducing the plaintiff to act to his detriment. The object
of damages is to compensate the plaintiff for all the loss he has suffered, so
far, again, as money can do it. In contract, the damages are limited to what
may reasonably be supposed to have been in the contemplation of the parties.
In fraud, they are not so limited. The defendant is bound to make reparation
for all the actual damages directly flowing from the fraudulent inducement.
The person who has been defrauded is entitled to say: 'I would not have
entered into this bargain at all but for your representation. Owing to your
fraud, I have not only lost all the money I paid you, but, what is more, I
have been put to a large amount of extra expense as well and suffered this or
that extra damages.'
"All such damages can be recovered: and it does not lie in the mouth
of the fraudulent person to say that they could not reasonably have been
foreseen. For instance, in this very case Mr. Doyle has not only lost the
money which he paid for the business, which he would never have done if there
had been no fraud: he put all that money in and lost it; but also he has been
put to expense and loss in trying to run a business which has turned out to be
a disaster for him. He is entitled to damages for all his loss, subject, of
course to giving credit for any benefit that he has received. There is nothing
to be taken off in mitigation: for there is nothing more that he could have
done to reduce his loss. He did all that he could reasonably be expected to
do."
"It appears to me that in a case where there has been a breach of
warranty of authority, and still more clearly where there has been a tortious
wrong consisting of a fraudulent inducement, the proper starting point for any
court called upon to consider what damages are recoverable by the defrauded
person is to compare his position before the representation was made to him
with his position after it, brought about by that representation, always
bearing in mind that no element in the consequential position can be regarded
as attributable loss and damage if it be too remote a consequence: it would be
too remote not necessarily because it was not contemplated by the representor,
but in any case where the person deceived has not himself behaved with
reasonable prudence, reasonable common sense, or can in any true sense be said
to have been the author of his own misfortune. The damage that he seeks to
recover must have flowed directly from the fraud perpetrated upon
him."
"While the general rule undoubtedly is that damages for tort or
breach of contract are assessed at the date of the breach . . . this rule also
should not be mechanistically applied in circumstances where assessment at
another date may more accurately reflect the overriding compensatory
rule."
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. In 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.
" . . . it would, in my view, be unsafe to make a finding of
dishonesty against Mr. Roberts on the unsupported evidence of Mr. Lewis and
Mr. Abrahams, I approach the examination of the events of 21 July 1989 on the
basis that little, if any, weight can be given to their evidence where it is
in conflict with that given by Mr. Roberts."
"It is commonplace of judicial experience that a witness who makes a
poor impression in the witness box may be found at the end of the day, when
his evidence is considered in the light of all the other evidence bearing upon
the issue, to have been both truthful and accurate. Conversely, the evidence
of a witness who at first seemed impressive and reliable may at the end of the
day have to be rejected. Such experience suggests that it is dangerous to
assess the credibility of the evidence given by any witness in isolation from
other evidence in the case which is capable of throwing light on its
reliability; . . ."
"Events at the pricing meeting and the making of the second and
third representations as found by the judge are all inexplicable unless the
first representation had also been made. . . . The judge failed to stand back
and consider his finding as to the first representation in the light of his
findings as to the second and third. Had he done so, we have little doubt that
he would have been driven to conclude, as we do, that the first representation
was also made."
"I am not satisfied that the first representation was made in the
earlier telephone conversations in the morning of 21 July 1989 in sufficiently
unequivocal terms for it to form the basis for an action in deceit. . . ."
"If a man buys a horse, as a racehorse, on the false representation
that it has won some great race, while in reality it is a horse of very
inferior speed, and he pays ten or twenty times as much as the horse is worth,
and after the buyer has got the animal home it dies of some latent disease
inherent in its system at the time he bought it, he may claim the entire price
he gave; the horse was by reason of the latent mischief worthless when he
bought; but if it catches some disease and dies, the buyer cannot claim the
entire value of the horse, which he is no longer in a condition to restore,
but only the difference between the price he gave and the real value at the
time he bought."
"Where possible the law seems to like to ride two or three horses at
once; but occasionally a situation occurs where one must be selected. The
tendency is then to choose the deterrent purpose for tort of intention, the
compensatory purpose for other torts."
"There could be no doubt that there you would say that everything
would be taken into view that would go most against the wilful wrongdoer--many
things which you would properly allow in favour of an innocent mistaken
trespasser would be disallowed as against a wilful and intentional trespasser
on the ground that he must not qualify his own wrong, and various things of
that sort."
"In contract, the damages are limited to what may reasonably be
supposed to have been in the contemplation of the parties. In fraud, they are
not so limited. The defendant is bound to make reparation for all the actual
damages directly flowing from the fraudulent inducement. The person who has
been defrauded is entitled to say: 'I would not have entered into this bargain
at all but for your representation. Owing to your fraud, I have not only lost
all the money I paid you, but, what is more, I have been put to a large amount
of extra expense as well and suffered this or that extra damages.'
"All such damages can be recovered: and it does not lie in the mouth
of the fraudulent person to say that they could not reasonably have been
foreseen."
"If the plaintiff's bargain would have been a bad one, even on the
assumption that the representation was true, he will do best under the
tortious measure. If, on the assumption that the representation was true, his
bargain would have been a good one, he will do best under the first
contractual measure (under which he may recover something even if the actual
value of what he has recovered is greater than the price)."
"In my judgment, having determined what the plaintiffs have lost as
a result of entering into the transaction--their contract with Mr.
Chappell--it is still appropriate to ask the question whether that loss can
properly be treated as having been caused by the defendants' torts,
notwithstanding that the torts caused the plaintiffs to enter into the
transaction."