BAILII is celebrating 24 years of free online access to the law! Would you
consider making a contribution?
No donation is too small. If every visitor before 31 December gives just £1, it
will have a significant impact on BAILII's ability to continue providing free
access to the law.
Thank you very much for your support!
[New search]
[Printable RTF version]
[Buy ICLR report: [2001] QB 488]
[Buy ICLR report: [2000] 3 WLR 1760]
[Help]
Case No: QBENF 1999/1634/A2
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM MR JUSTICE BELL
Royal Courts of Justice
Strand, London, WC2A 2LL
Thursday 18 May 2000
B e f o r e :
LORD JUSTICE SIMON BROWN
LORD JUSTICE WARD
and
LORD JUSTICE SEDLEY
- - - - - - - - - - - - - - - - - - - - -
|
CLEF
AQUITAINE SARL & ANR
|
Respondents
|
|
-
and -
|
|
|
LAPORTE
MATERIALS (BARROW) LTD
(sued as Sovereign Chemical Industries Ltd)
|
Appellants
|
- - - - - - - - - - - - - - - - - - - - -
(Transcript of the Handed Down Judgment of
Smith Bernal Reporting Limited, 180 Fleet Street
London EC4A 2HD
Tel No: 0171 421 4040, Fax No: 0171 831 8838
Official Shorthand Writers to the Court)
- - - - - - - - - - - - - - - - - - - - -
Mr E. Bannister QC & Mr J. Holmes (instructed by Atha & Co of
Middlesbrough, Cleveland TS1 2PX, solicitors) for the Appellants
Mr M. Crane QC & Mr D. Fisher (instructed by Beechcroft Wansbroughs
of London EC4A 1BN, solicitors) for the Respondents
- - - - - - - - - - - - - - - - - - - - -
Judgment
As Approved by the Court
Crown Copyright ©
LORD JUSTICE SIMON BROWN:
On 11 December 1998, following a three week trial on liability, Bell J gave
judgment for the claimants against the defendants for damages for fraudulent
misrepresentation and breach of contract. The damages were later assessed
and, after deducting the defendants' admitted counterclaim and allowing simple
interest on both claim and counterclaim, the net amount found due to the
claimants as at 11 December 1998 was £370, 384.
The defendants' appeal is confined to the judge's holding that they are liable
to the claimants in damages for fraudulent misrepresentation. Their
principal contention is that their deceit caused the claimants no loss.
Failing this, however, they advance subsidiary arguments (a) that some or all
of the claim is barred by the Limitation Act 1980, and (b) that only the first
claimant has a cause of action against them. The claimants by cross-appeal
contend that the judge should have awarded compound interest rather than simple
interest on the damages.
Although the facts of the case are of considerable complexity - the reserved
judgment extending to 115 pages - I propose to state them comparatively
shortly: the detail tends mostly to obscure rather than illuminate the true
issues arising on the appeal. As found by the judge (and none of these
findings are challenged) they may be summarised as follows.
The claimants are French companies controlled by an English national, Mr Colin
Gwyer, and wholly or mainly owned by Mr Gwyer and his wife. The first
defendant (Sovereign) is an English company which, during the relevant period,
sold and supplied chemical damp-proofing and other remedial products for use in
the building industry. (The second defendant may be ignored for the purposes
of this appeal.)
On 3 May 1979 the first claimants entered into two distributorship agreements
with Sovereign effective for ten and twenty years respectively commencing on 1
January 1979 (the relevant agreement for present purposes being the twenty year
agreement) whereby they undertook to purchase from Sovereign and market and
distribute in France certain quotas of Sovereign products, annually increasing
in value. I shall explain later how by novations the second claimants took
over the agreements. As distributors, the claimants undertook a series of
wide-ranging obligations including to use their best endeavours to promote the
products and obtain orders in France, not to purchase or sell the product to
any competing supplier, not to sell any of the products outside France, to
provide a reasonable after-sales service in respect of the products sold, to
use every effort to safeguard Sovereign's interests, to use their best
endeavours to ensure that the products were used in the manner stipulated by
technical manuals, to use their best endeavours to maintain sufficient stocks
at convenient distribution points and provide adequate staff and sales
representatives, to supply promotional leaflets and advertising materials, and
to use best endeavours both to demonstrate the use of the products to the trade
and obtain technical certification from the relevant standards institutions.
Clause 5 of the agreements dealt with prices and price increases. So far as
material it provided:
"(1) Prices of the products purchased hereunder shall be as set out in the
price list annexed hereto less such discounts and subject to such special rates
as may from time to time be agreed by [the parties] provided that
[Sovereign] shall be entitled to increase such prices by giving to [the
claimants] at least one month's notice ... provided that such increase
shall be limited to the amount by which [Sovereign] shall increase such prices
appearing in its United Kingdom price list and charged to UK customers."
The "price list annexed" had previously been supplied to Mr Gwyer and discussed
between him and Sovereign's managing director, Mr Charles Dent, at various
pre-contractual meetings. It contained a minimum scale of prices and it was
with regard to this that the fraudulent misrepresentation was made. In answer
to enquiries made by Mr Gwyer, Mr Dent told him that Sovereign salesmen did not
and could not sell to customers at prices below those indicated on the minimum
scale. Thus he represented that the discounts negotiated by the claimants
were discounts from the lowest unit prices available to Sovereign's trade
customers. It was in reliance upon the truth of this representation, one
which apparently secured for the claimants a price lower than that available to
any of Sovereign's UK customers, that Mr Gwyer negotiated a price increase
formula which restricted the amount of any increase to that which both (a)
appeared in Sovereign's UK price list, and (b) was charged to Sovereign's UK
customers.
As the judge found, Mr Dent's representations were false and he knew them to be
false: at all material times Sovereign sold to its trade customers by
reference to other price lists (bulk price lists) which offered prices lower
than those on the list provided to Mr Gwyer. Certain customers, moreover,
were given big discounts even from those lower prices. The bulk price lists
were not published; they were for Sovereign's internal use only and Mr Gwyer
remained in ignorance of their existence until 1996.
The breach of contract claim, it is convenient to note at this stage, arose in
respect of the period 1991 - 1996 when, as appeared from sales data later
revealed on discovery, Sovereign had charged no price increases to their UK
customers. It followed that these increases could not properly be imposed on
the claimants under clause 5(1) of the distributorship agreements and were
accordingly recoverable as damages for breach of that clause.
The claimants assert, however, that they suffered substantially greater losses
through having been induced by Mr Dent's deceit to enter into the agreements in
the first place. Clause 5(1) provided for a price increase formula which
fixed the prices payable throughout the whole of the agreements' twenty year
term. The claimants claimed two heads of loss for the fraudulent
misrepresentation:
(i) The loss of the opportunity to make profits by re-selling in France at
lower prices, this head of claim being based upon the premise that Mr Gwyer,
but for the high acquisition costs to which he was committed under his
agreeements with Sovereign, would have reduced his prices in France by a
margin sufficient to stimulate sales.
(ii) The difference between the prices to which the claimants were committed
under the agreement and the prices which they would probably have been able to
negotiate had the misrepresentation not been made.
The judge rejected the first head of claim (put at some £5 million to
£7 million) on the basis that the claimants had proved neither (a) that
they would have reduced their resale price, even had they been able to acquire
the products more cheaply (they were charging their French customers a 300-400%
mark up in any event), nor (b) that, even if they had done so, that they would
thereby have increased their profits. He found for the claimants, however, on
the second head and it is against that finding that the appeal is brought.
Damages for deceit
Mr Bannister QC for the defendants challenges the whole basis of this second
head of claim. He argues that it is an attempt to obtain by another route
damages for loss of a bargain which are not recoverable for the tort of deceit.
Damages for deceit are only to compensate the person deceived for loss
suffered. Here the claimants failed to prove any such loss - either from
operating the distributorship agreements as a whole or as a result of the
individual purchases of Sovereign's products made under them. They can prove
no more than that they would have made a still greater profit had they entered
into yet more favourable agreements, and that, submits Mr Bannister, is
insufficient to sustain the claim.
I should first indicate briefly the factual route by which the judge determined
that, but for Mr Dent's misrepresentation, the claimants would have been better
off. The material part of his judgment reads as follows:
"None of the witnesses gave direct evidence as to what the position of [the
claimants] would have been if the fraudulent misrepresentation had not been
made. But I feel able to judge it on balance of probabilities. I have no
doubt that Mr Gwyer wanted his company ... to become the exclusive distributor
of [Sovereign's] products in France. I have no doubt that he wanted to buy
those products at prices which meant that [Sovereign's] customers in the UK
could not buy its products in the UK and take them to France to undersell [the
claimants]. ... In my judgment it is distinctly more probable than not
that, if Mr Dent had not made the false misrepresentations which he did, the
... discussion about [Sovereign's] prices would have revealed the existence of
prices to large customers, as in the bulk price lists, and probably the bulk
price lists themselves. In my judgment Mr Gwyer would have wished to
negotiate a discount from the prices in the bulk price list ... There was no
reason why Mr Dent should not have agreed such a discount. The bulk price
list ... provided for an agreed saleman's commission of 10% payable on the
prices in the list. What [Sovereign] sold to [the claimants] would not carry
salesman's commission ... Moreover, [Sovereign] were selling to some customers
at prices well below those on the bulk price list, although salesman's
commission was generally much less on such sales. Although some such sales
appear to have been at prices as much as 25% below bulk price list, no doubt
due to particular market pressures, I do not believe that Mr Gwyer would have
negotiated a commission or discount as great as that as part of a long term,
exclusive distribution agreement. I judge that he would have achieved a
discount on bulk price lists prices of somewhere between the May 1978
salesman's commission of 10% and the discount of 25% ... which he achieved on
the minimum standard rate price list prices. I can do no better than take the
mid-way point of 17.5% as the discount which Mr Gwyer would probably have
achieved on the bulk price list prices and agreed as the pricing mechanism in
the 1979 agreements which would have followed, if the false and fraudulent
misrepresentations, the deceit, had not taken place. ... The agreements
would have had a price clause with the same provisos as clause 5(1) of the
actual agreements, relating to price increases only, but related to prices
appearing in [Sovereign's] bulk price lists."
In short, the judge concluded on the balance of probabilities that, but for Mr
Dent's deceit, the claimants could and would have entered into the same
distribution agreements but on more favourable terms as to price, and that
their loss was therefore the difference between the lower prices which in those
circumstances they would have paid and the prices actually paid.
Although Mr Bannister disputes the sufficiency both of the claimants' pleadings
and of the evidence as a whole to support such a conclusion, in my judgment
there is nothing in these points and I content myself with saying so. I
therefore turn directly to examine the judge's conclusions upon the legal
argument arising, the recoverability of damages on this basis for the tort of
deceit. Having been referred to a number of authorities, most notably
Smith New Court Securities Ltd v Citibank NA [1997] AC 254, East v
Maurer [1991] 1 WLR 461 and Downs v Chappell [1997] 1 WLR 426, the
judge said this:
"Having considered those authorities, I cannot accept Mr Bannister's argument
that it is not legitimate to reconstruct the deal which Mr Gwyer and his
companies would have made with [Sovereign] if the fraudulent misrepresentations
had not been made in order to compare it with the deal they in fact made and
thereby to calculate the plaintiffs' recoverable loss in this case. It seems
to me that that is the exercise which the Court of Appeal approved in East v
Maurer and which Lord Steyn approved in Smith New Court. ....
The result may be the same as a loss of bargain claim, but, as Mr Crane argued,
that does not mean that it is a loss of bargain claim. It is the best way of
judging the loss, if any, which was caused directly to the plaintiffs by being
induced by the deceit to enter the agreements which they did ... It
establishes the loss, if any, which the plaintiffs have suffered with a view to
putting them in the position they would have been in if no representations had
been made.
In my judgment this leads to the conclusion that the plaintiffs have
established a direct loss, recoverable as damages, in the sum of the difference
between (a) what they would have paid had the price of [Sovereign's] product
purchased by them between 1979 and 1996 been the lowest bulk price list price,
subject to increases but not decreases appearing in those lists and charged to
UK customers, less a discount of 17.5%, and (b) what they actually paid in
accordance with the agreements.
I do not accept Mr Bannister's argument that the product bought had no value
save what the plaintiffs paid for it. In my view its actual value to the
plaintiff was what they would have paid for it, bulk list price less 17.5%, had
they not been induced to pay more by the misrepresentations. Mr Dent said
that customers who were aware of the market pressures paid below bulk list
prices, which was tantamount to saying that the prices which they paid, below
bulk list, were the market value to large customers like [the claimants].
The plaintiffs are entitled to recover by way of damages the full price paid by
them (or rather, since the claim for over-charging has been formulated as a
separate claim for breach of contract, the full price as fixed by the
agreements), but they must give credit for the benefit they have received as a
result of the transaction, and in my judgment that benefit is the real value to
them of [Sovereign's] product which they bought, namely bulk list price less
17.5%."
Mr Bannister criticises the judge's reasoning throughout that section of the
judgment. It is, he submits, contrary to principle to seek to reconstruct the
deal which would have been reached but for the deceit. In reality the
claimants suffered no loss as a result of this transaction. The judge found
no over-value of the products in any ordinary sense. The court should not,
he submits, however gross the fraud, try to secure for the claimants some
uncovenanted benefit. In contract the party making the representation is
bound by it: he is selling his promise and it is enforceable against him. In
tort, however, whether the claim be for negligent misrepresentation or for
deceit, no claim arises unless actual loss results. Here none did. The
judge expressly found that the level of prices charged caused them no loss of
profits in their business in France. This whole case, the appellants argue,
is an attempt to create for the claimants a contractual claim to which they
were never entitled.
These to my mind are powerful arguments and I do not pretend to have found the
point an easy one.
In Smith New Court Lord Browne-Wilkinson, summarising the principles
applicable in assessing damages payable where the plaintiff has been induced by
a fraudulent misrepresentation to buy property, stated the first three 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) 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 ... "
Lord Steyn said that the decision of the Court of Appeal in Doyle v Olby
(Ironmongers) Limited [1969] 2 QB 158 justified 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 contempory case note on Doyle v
Olby (Ironmongers) Ltd: G.H. Treitel, Damages for Deceit (1969) 32 M.L.R.
556, 558-559. The author said:
`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 contractural measure (under
which he may recover something even if the actual value of what he has
recovered is greater than the price).'
(5) ... 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."
A little later in his speech, Lord Steyn considered Hobhouse LJ's judgment in
Downs v Chappell and observed:
"... it is not necessary in an action for deceit for the judge, after he has
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."
Finally, Lord Steyn said this:
"... 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 directly flowing 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. .... 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."
The difficulty in the present case, as it seems to me, is in deciding whether
"all the damage (actual loss) directly flowing from the transaction" (Lord
Browne-Wilkinson's first principle and Lord Steyn's fifth proposition can
encompass, in a case like the present where the actual transaction entered into
has been profitable rather than loss-making, the loss occasioned through the
party deceived having entered into that particular transaction rather than a
different transaction which would have been yet more profitable. In
submitting that it cannot, Mr Bannister not surprisingly places considerable
reliance on Lord Steyn's statement that "it is not necessary ..., after ...
ascertain[ing] 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." Indeed this very statement,
he submits, usefully contrasts "the loss directly flowing from ... the
transaction" with any idea of comparing one profitable transaction with another
in order to find a "loss" in this way. To do that, he submits, is also to
offend against Lord Steyn's first three propositions: it is to protect the
claimants in respect of their positive interest rather than compensate them in
respect of their negative interest, in this bargain; to create for them a
contractual measure of damages. It comes to this: unless and until the
claimants can show (which they cannot) that these distributorship agreements
caused them loss, they have no claim in tort. It is not sufficient for their
purpose to show only that other distributorship agreements would have
given them greater profit.
It is helpful at this point to consider East v Maurer, the authority
principally relied upon by the judge below in carrying out the exercise he did.
In East v Maurer the plaintiffs bought a hairdressing salon from the
defendant who falsely represented that he would not be working at another of
his salons in the area. His fraud was discovered when the plaintiffs were
unable to make their salon profitable and found business falling away. They
were unable to sell the salon for three years. They were held entitled to
recover damages consisting of the difference between its purchase and sale
price, the expenses of buying and selling it, the cost of improvements to try
to make it profitable, trading losses during the three year period, general
damages for disappointment and inconvenience, and, most importantly for present
purposes, damages representing the loss of profit the plaintiffs could
reasonably have anticipated had they bought not the salon they were induced to
buy by the defendant's deceit but rather a different hairdressing business
bought for a similar sum.
Beldam LJ at page 467 said this:
"... I consider that on the facts found by the judge in the present case, the
plaintiffs did establish that they had suffered a loss due to the defendant's
misrepresentation which arose from their inability to earn the profits in the
business which they hoped to buy in the Bournemouth area. I would therefore
reject the submission of [counsel for the defendant] that loss of profits is
not a recoverable head of damage in cases of this kind."
Having then criticised the trial judge for "bas[ing] his award on an assessment
of the profits which the business actually bought by the plaintiffs might have
made if the statements made by the first defendant had amounted to a warranty
that customers would continue to patronise the salon in Exeter Road", Beldam LJ
continued:
"It seems to me that he should have begun by considering the kind of profit
which the second plaintiff might have made if the representation which induced
her to buy the business ... had not been made, and that involved considering
the kind of profits which she might have expected to make in another
hairdressing business bought for a similar sum."
Mustill LJ at page 468 agreed and added:
"... the best course in a case of this kind is to begin by comparing the
position of the plaintiff as it would have been if the act complained of had
not taken place with the position of the plaintiff as it actually became.
This establishes the actual loss which the plaintiff has suffered and often
helps to avoid the pitfalls of double counting, omissions and impermissible
awards of both a capital and an income element in respect of the same loss
...
In the present case the act complained of is the making of the fraudulent
representation, coupled with the reliance placed upon it by the plaintiffs in
concluding the bargain. If this had not happened the plaintiffs would, on the
judge's findings, have ... bought a new business in Bournemouth albeit not the
one in Exeter Road. ...
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. I should have thought this argument sound if the judge had
included an item for loss of the Exeter Road profits; but he has not done so.
The loss of profits award relates to the hypothetical profitable business in
which the plaintiffs would have engaged but for buying the Exeter Road
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."
As the judge below observed, East v Maurer was approved by Lord Steyn in
Smith New Court at page 282:
"East v Maurer if 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 over-simplification. 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."
Mr Bannister submits that East v Maurer was a very different case from
the present and that the point established there and approved in Smith New
Court cannot avail the claimants here. It is one thing to say that, in
quantifying the undoubted losses resulting from the plaintiffs' tortiously
induced purchase of the salon in Exeter Road, they could properly include as
consequential loss the profits they might reasonably have expected to make in
another business which they would, but for the defendant's fraud, have
purchased; quite another to say that, even had Exeter Road proved profitable,
they could have claimed in tort on the basis that, but for the fraud, it would
have been more profitable still.
The novelty of the present case lies in the claimants having suffered no loss
from the transaction save only from having entered into that transaction rather
than a still more profitable one. That distinguishes this case from all the
others we were shown. Is it, however, a distinction fatal to the claimants'
success?
Mr Crane QC submits not. His starting point is Lord Steyn's sixth proposition
in Smith New Court with regard to "the overriding compensatory
principle":
"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."
The claimants' argument is quite straightforward. Before Mr Dent's
fraudulent statement, the claimants were anxious to become Sovereign's
exclusive distributors in France and were negotiating agreements, and in
particular prices and a price increase formula, to that end. In reliance on
the fraudulent statement they became locked into these long term agreements and
a commitment to pay prices and price increases larger than would otherwise have
been the case. The judge below did no more and no less than compensate them
for having thereby worsened their position. This accorded with the overriding
principle.
In my judgment this argument is correct. The judge did not, be it noted, make
the mistake of awarding damages by reference to the contractual measure.
Indeed it is not altogether clear what that measure would have been. It would
have depended on whether the warranty was that Sovereign's UK customers paid
what Mr Dent said they paid, or that the claimants would always be charged 25%
less than UK customers paid. If it had been the former, there was no evidence
to suggest that the claimants suffered loss by its breach, in particular no
evidence that Sovereign's UK customers were able (as Mr Gwyer had feared) to
undersell the claimants in France. Had it been the latter, however, then
instead of taking 17½% off bulk price list prices, the judge would have
had to take 25% off (the sometimes heavily discounted) bulk price list prices.
As it was, of course, the judge concluded that, had Mr Dent, in response to Mr
Gwyer's questioning, told the truth (or at least not lied) about what his UK
customers were paying, the claimants would have got a substantially better deal
than they did, but not as good a deal as the defendants dishonestly pretended
they were getting.
As for Lord Steyn's statement that it is unnecessary "to embark on a
hypothetical reconstruction of what the parties would have agreed had the
deceit not occurred", this has to be understood in the context of Hobhouse LJ's
"qualification" in Downs v Chappell which Lord Steyn was criticising.
What Hobhouse LJ had done, by way of a "check" on the conventional measure, was
"to compare the loss consequent upon entering the transaction with what would
have been the position had the represented or supposed state of affairs
actually existed." To reject that exercise (a different exercise, be it
noted, from that undertaken by the judge in the present case) was not to reject
the possibility that the ascertainment of loss in the first place might itself
require a "hypothetical reconstruction of what the parties would have agreed
had the deceit not occurred." If, as was held in East v Maurer (a
holding expressly approved by Lord Steyn), consequential loss can be
established and awarded by reference to "the hypothetical profitable business
in which the plaintiff would have engaged but for [the] deceit", why should
that loss, to be recoverable, have to be parasitic on some other, more direct,
loss, and why should the alternative "hypothetical profitable business" have to
be a business (or, as here, contract) notionally acquired from some third
party?
True it is that in Downs v Chappell Hobhouse LJ, in a part of the
judgment not criticised in Smith New Court, said at page 433:
"It was wrong both factually and legally for the judge to create the hypothesis
that the second defendants could and would have given the plaintiffs accurate
figures so as to give them an accurate basis upon which to decide whether to
make a contract with Mr Chappell."
But that was in the context of establishing liability, not quantifying damage.
True it is too that later in his judgment at page 441, having referred to
East v Maurer, Hobhouse LJ said this:
"In general, it is irrelevant to enquire what the representee would have done
if some different representation had been made to him or what other
transactions he might have entered into if he had not entered onto the
transaction in question. Such matters are irrelevant speculations ..."
That, however, was expressed to be "in general" and, as I conclude, there will
be particular cases, of which this is one, where to give effect to the
overriding compensatory rule it will be both possible on the facts, and
appropriate in law, to hypothesise. Not every hypothesis involves irrelevant
speculation.
I have, in short, reached the conclusion that there is no absolute rule
requiring the person deceived to prove that the actual transaction into which
he was induced to enter was itself loss-making. (Indeed that concept itself
is an uncertain one: is a business which survives only by dint of the
proprietor limiting himself to subsistence wages loss-making or profitable?)
It will sometimes be possible, as it was here, to prove instead that a
different and more favourable transaction (either with the defendant or with
some third party) would have been entered into but for the fraud, and to
measure and recover the claimants' loss on that basis.
It is, I should just add, on that basis rather than on the basis that the
claimants are entitled to be compensated as if they had been induced to make
each and every purchase above "market value", that I would uphold this award.
It is, of course, true that the normal measure of damages for a fraudulently
induced purchase of shares or other property or services is the price paid less
their actual value. I have, however, some difficulty in ascribing to these
products any particular value such as would enable this claim to be disposed of
according to so enticingly conventional an approach. After all, as already
stated, these products were retailed in France at a 300-400% mark-up (although
mark-up, of course, is very different from profit); why then should actual
value be equated with the prices the claimants could reasonably have hoped to
negotiate under their unique distributorship agreements?
That, however, matters not. Once it is recognised that the claimants need not
prove each purchase, any more than the agreements as a whole, to be
loss-making, it becomes unnecessary to force the case into the straightjacket
of value/price comparison. Lord Browne-Wilkinson's third principle in terms
relates to the purchase of property, not to long-term agreements like these.
I turn next to the other two grounds of appeal which I can deal with altogether
more briefly.
The Limitation Act 1980
The claimant's cause of action arose in 1979 and, therefore, subject to s.32 of
the 1980 Act, it would have become statute barred in 1985. The fraud was
only discovered, however, in 1996, when the writ was issued.
S.32 so far as material provides:
"(1) ... where in the case of any action for which a period of limitation is
prescribed by this Act, either -
a. the action is based upon the fraud of the defendant ...
the period of limitation shall not begin to run until the plaintiff has
discovered the fraud ... or could with reasonable diligence have discovered
it."
Mr Bannister submits that with reasonable diligence the claimants could have
discovered this fraud before 1990 (i.e. more than six years before the issue of
the writ). He relies in particular on Mr Gwyer's acknowledgment in evidence
that he could have asked Sovereign's UK customers what prices they were paying
or perhaps found that out from someone he knew at Palace Chemicals (a rival
concern to Sovereign formed by certain of their ex-employees).
As to the correct approach to s.32, Mr Bannister relies upon Millett LJ's
judgment in Paragon Finance v DB Thakerar & Co [1999] 1 AllER 400,
418:
"The question is not whether the plaintiffs should have discovered the
fraud sooner; but whether they could with reasonable diligence have
done so. The burden of proof is upon them. They must establish that
they could not have discovered the fraud without exceptional measures
which they could not reasonably have been expected to take. In this context
the length of the applicable period of limitation is irrelevant. In the
course of argument May LJ observed that reasonable diligence must be measured
against some standard, but that the six year limitation period did not provide
the relevant standard. He suggested that the test was how a person carrying
on a busines of the relevant kind would act if he had adequate but not
unlimited staff and resources and were motivated by a reasonable but not
excessive sense of urgency. I respectfully agree."
In that case, however, the plaintiffs were aware that they had suffered a loss
which could be the result of fraud and, instead of making enquiries, had waited
while they took other proceedings. Here, by contrast, Mr Gwyer had no
suspicion whatever that he was being defrauded. On the contrary, the parties'
relationship proceeded on trust. On 30 August 1984 Mr Dent wrote to Mr Gwyer
speaking of "not only the good business which we do together but the excellent
way in which it is done. It is most rare to conduct business with someone
where honesty and truth are never doubted and it is even more rare for me to
admit it." When, moreover, in November 1991 Mr Gwyer did enquire of Mr Dent's
successor, Mr Dodds, whether he was getting the best prices, Mr Dodds lied,
reassuring Mr Gwyer that he was.
As Mr Bannister came to recognise, his argument could only succeed if the
principle to be applied is: never trust anyone in business; always make
enquiries. I utterly reject any such principle. Such an attitude in my
judgment involves "exceptional measures", not "reasonable diligence".
The Second Claimants
To understand the appellant's argument that the second claimants never acquired
a cause of action against them with the result that any entitlement to damages
for misrepresentation ended in 1987 when the first claimant ceased to operate
the agreements, it is necessary to set out certain further facts.
In 1987 the distribution agreements were novated to Assechements Sovereign
(AS), another of Mr Gwyer's companies. The novation agreement was made by Mr
Dent on behalf of Sovereign, and Mr Gwyer acting on behalf of both the first
claimants and AS, being the controlling mind and shareholder of each.
In 1994 AS, along with its rights and liabilities, was assimilated by the
second claimants, another of Mr Gwyer's companies, under a process of "merger"
recognised under French law. Again there was a tripartite novation agreement,
this time substituting the second claimants for AS as the party to the
distribution agreements. Sovereign were acting by Mr Dodds, Mr Dent's
successor; AS and the second claimants by Mr Gwyer, again as their
controlling mind and shareholder.
Sovereign's initial deceit continued to operate on Mr Gwyer's mind throughout
the whole period, indeed up to 1996 when it was discovered. That is hardly
surprising. Not only had Sovereign done nothing to retract it; instead, in
June 1991 Mr Dodds began sending Mr Gwyer (he being Sovereign's largest
customer by far) "personalised price lists" so as to conceal the fact that the
prices being charged to his companies were higher than those being charged to
the UK customers; and in November 1991, when Mr Gwyer enquired of Mr Dodds
whether he was getting the best prices, Mr Dodds falsely reassured him that he
was.
In the light of these facts the judge below concluded:
"There was, in 1987, acquiescence by [Sovereign] in the same fraudulent
misrepresentations which had acted on the mind of [the first claimants] through
Mr Gwyer, acting on the mind of AS through Mr Gwyer thereby availing itself,
with regard to AS of the misrepresentations which it had made in 1978. The
means and the end were the same. It was not a case of mere non-disclosure or
tacit acquiescence in another's self-deception."
He reached a similar conclusion in respect of the 1994 novation and, indeed,
both sides agree that the two transactions are for present purposes
indistinguishable. In short, he held that Sovereign were liable for their
1978 deceit equally to AS, and in turn to the second claimants, as to the first
claimants.
The two authorities in point are Pilmore v Hood (1838) 5 Bing. N.C. 97
and Gross v Hillman Limited [1970] Ch. 445, both of which were
cited to the judge below and, as he concluded, consistent with his conclusion.
It is Mr Bannister's submission, however, that the judge was wrong to take this
view and it is accordingly necessary to examine those cases.
In Pilmore v Hood the representee contracted with the fraudulent
representor for the purchase of a public house but before completion passed on
the contract to the plaintiff with the representor's consent. It was averred
that the representor had notice that the representee had communicated the
representation to the plaintiff prior to completion and took no steps to
retract it. In those circumstances the plaintiff was held to have a cause of
action notwithstanding that the representation had not been made to him and
that the vendor had not authorised its transmission to him.
Gross v Hillman distinguished Pilmore v Hood on the facts. The
position there was that the plaintiff agreed to buy a shop from Grace Rymer (a
property dealing company whose managing director was Colonel Sinclair) which
Grace Rymer had itself just been induced to purchase from the defendants as a
result of a (postulated) fraudulent misrepresentation made to Colonel Sinclair
by the defendant's alter ego, one James. Cross LJ said this:
"... if the plaintiff, acting on Colonel Sinclair's recommendation, had herself
contracted with James to buy the property, it may very well be that she could
have rescinded the sale after conveyance if the misrepresentations made to
Grace Rymer were fraudulent. But Grace Rymer itself agreed to buy the
property, and that, as I see it, makes a very great difference. Assuming that
the plaintiff was within the class of persons to whom the representations were
originally made [on the basis that the defendants knew that Grace Rymer were
looking for a property to sell on to the plaintiff], she fell out of the class
when Grace Rymer agreed to buy the property. The original representations
were spent, and Grace Rymer thereafter dealt with her as owners in equity of
the property who were prepared to let her take it over for a commission. She
could no doubt have relied on the misrepresentations if James or some agent of
his had repeated them to her or some agent of hers. Again, if James had known
that Colonel Sinclair was handing on his bargain to the plaintiff and was
repeating to her the misrepresentations which he (James) had made to him and he
stood by and allowed her to complete the purchase from him without
disillusioning her, she might well have been able to rescind. It would have
been such a case as Pilmore v Hood. ..."
As I understand Mr Bannister's submission, it is that Sovereign's deceit was
spent when the first claimants initially entered into the distribution
agreements (just as James' deceit was held spent when Grace Rymer had agreed to
buy the property in Gross v Hillman). For my part, however, I prefer
Mr Crane's submission based on the latter part of Cross LJ's judgment. It
seems to me plain on the judge's findings here that Mr Dent (and later Mr
Dodds) knew that Mr Gwyer (qua the first claimants) "was handing on his bargain
to the plaintiff [in this instance Mr Gwyer qua successively AS and the second
claimants] and was [notionally] repeating to [them] the misrepresentations
which [Sovereign] had made to him and he stood by and allowed [them] to
complete the [novations] without disillusioning [them]."
I recognise, of course, the distinctions between the two cases consisting of
(a) Mr Gwyer's involvement effectively as the alter ego of all three
successive parties to the distribution agreements, and (b) the ongoing nature
of the damages claim so that all three claimants suffered loss by reason of the
deceit. To my mind, however, these are distinctions without a difference.
The first, if anything, makes this a yet stronger case than Pilmore v
Hood; the second is the consequence of calculating the damages in the
manner I have already endorsed.
The cross-appeal: compound interest
Mr Crane submits that the judge should have awarded compound interest, rather
than merely simple interest, on the misrepresentation damages. Otherwise, he
argues, the defendants would have benefited from their own fraud by using the
monies obtained (in effect, excess payments made by the claimants under the
distribution agreements) for their own trade purposes, alternatively by saving
interest on borrowings which would have been compounded at monthly or quarterly
rates.
Mr Bannister argues principally that the court has no jurisdiction to award
compound interest on damages for fraud. The law, he submits, is accurately
stated in the Supreme court Practice (Vol. 1, 1999) at page 59:
"Under its equitable jurisdiction the court had, and still has, power to award
interest as ancillary relief in respect of equitable remedies such as specific
performance, rescission or the taking of an account. Under this jurisdiction,
interest may be ordered to be paid where money has been obtained and retained
by fraud (Johnson v R [1904] AC 817), or where money has been withheld
or misapplied by an executor, trustee or anyone else in a fiduciary position
and, in such case, the court has an inherent power to order the payment of
interest at whatever rate is equitable in the circumstances and may direct that
such interest be compounded at appropriate intervals (Wallersteiner v
Moir (No. 2)
[1975] QB 373, CA).
The jurisdiction of the court to award compound interest (other than where it
could be claimed by contract or usage) could not be extended and the power of
the court to make such an award was confined to the equitable jurisdiction to
award compound interest against a trustee or other person owing fiduciary
duties who was personally accountable and had made use of the plaintiff's
monies (Westdeutsche Landesbank Girozentrale v Islington LB
Council [1996] 2 AllER 961)."
Mr Crane submits that the Supreme Court Practice is misleading insofar as it
suggests that "where money has been obtained and retained by fraud," only
simple interest and not compound interest may be ordered, compound interest
being confined to cases of trustees or others owing fiduciary duties. He
relies on passages in the speeches in two House of Lords authorities,
President of India v La Pintada Compania Navigacion S.A. [1985]
AC 106, and Westdeutsche [1996] AC 669 (the rates swap case).
In President of India at page 116 Lord Brandon considered the law as to
the award of interest in four separate areas, the third being equity:
"Thirdly, the area of equity. The Chancery courts, again differing from the
common law courts, had regularly awarded simple interest as ancillary relief in
respect of equitable remedies, such as specific performance, rescission and the
taking of an account. Chancery courts had further regularly awarded interest,
including not only simple interest but also compound interest, when they
thought that justice so demanded, that is to say in cases where money had been
obtained and retained by fraud, or where it had been withheld or misapplied by
a trustee or anyone else in a fiduciary position. ... Courts of Chancery
only in two special classes of case, awarded compound, as distinct from simple,
interest."
In Westdeutsche, Lord Browne-Wilkinson, under the heading Compound
interest in equity, at pages 700-702, said this:
"It is common ground that in the absence of agreement or custom the court has
no jurisdiction to award compound interest ... It is also common ground that in
certain limited circumstances courts of equity can award compound interest.
... the local authority contends that compound interest can only be ordered on
a claim against a trustee or other person owing fiduciary duties who in breach
of such duty has used trust monies in his own trade. ... the bank contends
that compound interest can be awarded in equity whenever the defendant is
liable to disgorge a benefit received whether or not he is a trustee or a
fiduciary ... In the absence of fraud courts of equity have never awarded
compound interest except against a trustee or other person owing fiduciary
duties who is accountable for profits made from his position. Equity awarded
simple interest at a time when courts of law had no right under common law or
statute to award any interest. The award of compound interest was restricted
to cases where the award was in lieu of an account of profits improperly made
by the trustee. We were not referred to any case where compound interest had
been awarded in the absence of fiduciary accountability for a profit."
Then, having referred to Burdick v Garrick (1870) LR 5 Ch. App. 233,
Wallersteiner v Moir (No. 2), and President of India, Lord
Browne-Wilkinson concluded:
"These authorities establish that in the absence of fraud equity only awards
compound (as opposed to simple) interest against a defendant who is a trustee
or otherwise in a fiduciary position by way of recouping from such a defendant
an improper profit made by him. It is unnecessary to decide whether in such a
case compound interest can only be made where the defendant has used trust
monies in his own trade or (as I tend to think) extends to all cases where a
fiduciary has improperly profited from his trust."
True it is that Lord Browne-Wilkinson there twice referred to courts of equity
awarding compound interest, "in the absence of fraud", only against those in a
fiduciary position (thereby implying that compound interest could also be
awarded in cases of fraud); and that he cited with evident approval Lord
Brandon's dictum in President of India to the effect that one of
the two special classes of case in which Chancery courts awarded compound
interest was "where money had been obtained and retained by fraud". As,
however, Lord Browne-Wilkinson stated, "we were not referred to any case where
compound interest had been awarded in the absence of fiduciary accountability
for a profit", and neither Westdeutsche nor President of India
were themselves cases of fraud. Johnson v R (the Privy Council case
cited in the above passage from the Supreme Court Practice), was such a
case but the only interest under consideration was simple interest, not
compound interest. The Board in fact allowed the appeal there against
interest since "the Crown seems intentionally and deliberately to have put
aside all questions of fraud." Lord Macnaughten stated, however:
"In order to guard against any possible misapprehension of their Lordships'
views, they desire to state that, in their opinion, there is no doubt whatever
that money obtained by fraud and retained by fraud can be recovered with
interest, whether the proceedings be taken in a court of equity or in a court
of law ..."
I remain, I confess, puzzled as to what the true position is. Is there or is
there not jurisdiction in equity to award compound interest on damages
(strictly compensation) in cases where the defendant owes no fiduciary duty but
has acted fraudulently? One day, no doubt, it will be necessary to decide
that question. But not, as I think, in this case. Since the judge below
gave no reasons for refusing the application for compound interest, we can
confidently infer that he assumed there was jurisdiction to award it, but chose
not to do so. It is not customary to explain the exercise of such a
discretion. If, however, the judge considers himself without jurisdiction to
accede to an application, he can be expected to say so and to say why. The
judge was clearly entitled to exercise his (assumed) discretion to award simple
interest only. There is therefore no sufficient basis to disturb the
result.
It follows from all this that I for my part would dismiss both the appeal and
the cross-appeal.
LORD JUSTICE WARD:
I have had the benefit of reading my Lords' judgments in draft. I gratefully
adopt the recitation of facts and law set out in Simon Brown L.J.'s judgment.
Like him, I have found the main question difficult to answer. Like Sedley L.J.
I have no difficulty in finding that there has to be some damage flowing
from the deceit. If the prices at which Mr Dent was prepared to sell his
products in 1978 and the prices to which Mr Dodds was referring in 1991 were
truly the lowest prices at which they were prepared to do business and thus "a
good deal", then if they had been honest and had said that they could go no
lower, then the negotiation might have collapsed, or Mr Gwyer might have
capitulated or the deal might have been struck at a lower price. What is
obvious is that the defendants lied because they wished to avoid being forced
to cut their margins. They cheated to protect and gain that extra margin. The
inference is irresistible that if the lies had not been told, a lower price
would have been paid. To award nominal damages for that fraud would make a
laughing stock of the law. If common sense and justice are the test, then the
claimant must prevail. I have no hesitation in agreeing with the result my
Lords have reached but, having wrestled with the arguments, I feel obliged to
explain how I arrive there.
The Deceit.
One must begin with the misrepresentation. The judge found that:-
"At meetings before the Agreements were made, Mr Dent acting for SCI
represented to Mr Gwyer who was at that time acting for Clef, that SCI did not
sell any products at prices which were less than the minimum rates which
appeared in its national or standard price list, and that the prices charged to
Clef for any product would be less than the lowest price charged to any U.K.
customer for the same product. Those representations were false and they were
known by Mr Dent to be false. They were fraudulent misrepresentations."
Although there were provisions in the contract relating to prices, these
particular representations were never elevated into the force of contractual
warranties.
The Measure of Damages.
I take this from paragraph 1962 in McGregor on Damages, 16th Edition:
"Thus the correct measure of damages in the tort of deceit is an award which
serves to put the plaintiff into the position he would have been in if the
representation had not been made to him, and not, as with breach of condition
or warranty in contract, into the position he would have been in if the
representation had been true. In other words, if the plaintiff has been
induced by the deceit to conclude a contract he is not entitled, as he is in
contract, to recover in deceit for the loss of his bargain."
In McConnell v Wright [1903] 1 Ch 546, 554, Lord Collins M.R.
characterised the action in this way:
"... it is an action for a wrong done whereby the plaintiff was tricked out of
certain money in his pocket ..."
One can paraphrase that by saying that the measure of damages is the sum lost
by being tricked. In Clark v Urquhart [1930] A.C. 28, 67, Lord Atkin
said:
"I find it difficult to suppose that there is any difference in the measure of
damages in an action of deceit depending on 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."
In the High Court of Australia Dixon J. said in Toteff v Antonas (1952)
87 C.L.R. 647, 650/1:-
"In an action of deceit a plaintiff is entitled to recover as damages a sum
representing the prejudice or disadvantage he has suffered in consequence of
his altering his position under the inducement of the fraudulent
misrepresentations made by the defendant. When what he has been induced to do
is to make a purchase from the defendant and part with his money to him in
payment of the price, then, if the transaction stands and is not disaffirmed or
rescinded, what is recoverable is "the difference between the real value of the
property, and the sum which the plaintiff was induced to give for it", per
Abbot L.C.J. Pearson v Wheeler (1825) Ry. & Mood. 303, 304. As Sir
James Hannen P. in Peek v Derry (1887) 37 ChD 541, 594 pointed out,
the question is how much worse off is the plaintiff than if he had not entered
into the transaction. If he had not done so he would have had the money in his
pocket. To ascertain his loss you must deduct from the amount he paid the real
value of the thing he got."
Doyle v Olby (Ironmongers) Ltd. [1969] 2 QB 158 somewhat relaxed the
apparent inflexibility of the earlier Victorian decisions which bound the court
to look at the matter at the date of the transaction.
East v Maurer [1991] 1 WLR 461 is explained by Simon Brown L.J. It was
a case concerned not with direct loss but with consequential loss arising from
the deceitful misrepresentation by the successful hairdresser that he would not
be working at his other salon in the area on a regular basis. It was submitted
on the defendant's behalf that the claim for damages was a disguised claim
based on a contractual warranty of profits to be achieved in the business which
had been purchased. Mustill L.J. rejected the argument saying at p. 468:-
"I should have thought this argument sound if the judge had included an item
for the loss of the Exeter Road profits; but he has not done so. The loss of
profits awarded relates to the hypothetical profitable business in which the
plaintiffs would have engaged but for buying the Exeter Road 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."
Mr Bannister Q.C. relies heavily on the observation in the judgment of Hobhouse
L.J. in Downs v Chappell [1997] 1 WLR 426, 441:
"In general, it is irrelevant to enquire what the representee would have done
if some different representation had been made to him or what other
transactions he might have entered into if he had not entered onto the
transaction in question. Such matters are irrelevant speculations ..."
The law is now settled by Smith New Court Securities Ltd. v Citibank
N.A. [1997] AC 254. It is in my view necessary to explain the facts of
that case. Smith New Court were fraudulently induced to purchase Ferranti
shares by Citibank 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. Unbeknown to all at that time the shares were already blighted by
a fraud perpetrated on Ferranti by one Guerin: they were, as Lord
Browne-Wilkinson said, "already pregnant with disaster."
Both the trial judge, Chadwick J., and the Court of Appeal proceeded on the
basis that 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. The difference between the trial
judge 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 at the transaction date. 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 the price was falsified by the defendant's representation. In all other
cases the market value had to be taken to be the quoted price. So, just as
Mustill L.J. had looked at the profits of a hypothetical business, here
Chadwick J. looked at the hypothetical value of the shares.
After analysing the authorities Lord Browne-Wilkinson said this at p. 266/7:
"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: (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 ..."
The third and fourth propositions are most useful for the resolution of the
case before us. There is also an important passage in Lord Mustill's speech at
p. 269:-
"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 rule ..."
Lord Steyn's sixth proposition stated at p. 282 was:
"It (the rule that the victim of the fraud is entitled to compensation for all
the actual loss directly flowing from the transaction induced by the wrongdoer)
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."
The Main Submissions of Mr Bannister Q.C.
First he submits that the judge was not justified in finding as he did because
the claim was not pleaded on the basis he found and there was no direct
evidence as to the hypothetical position upon which he depended. In fact the
basis of the pleading in paragraph 18.2 is that more was paid for the product
than the claimants would have paid had the representations not been made. I
confess I have not found any express pleading that the measure of damages is
the difference between the price paid and the actual value of the goods but
that is implicit in paragraph 18.2 and I would in any event not permit a
pleading point to allow a defendant to get away with blatant fraud. As for the
paucity of direct evidence I would robustly apply Lord Mustill's endorsement of
a rough and ready approach. I have also gained some help from the judgment of
Devlin J. in Biggin & Co. Ltd. v Permanite Ltd., Berry Wiggins & Co.
Ltd. (Third Parties) [1951] 1 K.B. 422, which I found useful insofar as it
concerned the measure of damages for the sale of defective goods where there
was no available market to establish their value. Devlin J. said at p.
437/8:
"The last point of principle to be considered concerns the assessment of the
notional value of the unsound Permasec. As between the third parties and the
defendants, there is very little to go on. The material was specially
compounded for the job, it was passed on by the defendants to the plaintiffs
and was never given a fair commercial trial. It is, therefore, very difficult
to say what it would have been worth in the defendant's hands if they had known
of its inherent defects. Mr Diplock has submitted that unless the defendants
can offer some reasonably precise evidence of the value of the unsound
material, they cannot discharge the burden of proving any substantial damage
and so must fail to recover anything more than nominal damages. He submits
that there is no such evidence in this case ...
It seems to me that one can very rarely arrive at an accurate figure of unsound
value. Where the breach is non-delivery, there is often a market price which
can be quoted, or evidence can be given of the price at which at the relevant
date similar goods were changing hands, but there is rarely any market price
for damaged goods, since their value depends on the extent of the damage. If
the actual damaged goods are sold with all their faults, good evidence can be
obtained of the difference in value, but such a sale is not always possible,
and a claim for substantial damages cannot be limited to goods which have been
sold. ... I think that in such a situation the court is bound to do the best
that it can. ... It is only that where precise evidence is obtainable, the
court naturally expects to have it. Where it is not, the court must do the
best it can. In Chaplin v Hicks [1911] 2 KB 786, Vaughan Williams
L.J. said:-
"... Sometimes, however, there is no market for the particular class of goods;
but no one has ever suggested that, because there is no market, there are no
damages. In such a case the jury must do the best they can and it may be that
the amount of their verdict will really be a matter of guesswork. But the fact
that damages cannot be assessed with certainty does not relieve the wrong-doer
of the necessity of paying damages for his breach of contract ..."
... Having regard to the very high price which was paid for what was supposed
to be sound material, I am satisfied it would have commanded a respectable
price even if sold with its known defects. There were doubtless cases where it
was used without any damage, as is shown by the evidence for the defence. The
difference in price between its purchase as a sound material by someone who
believed in it in October 1946 and its purchase for distillery use was about
50%. I do not take this as more than a very rough guide, but it accords with
my view of the sort of discount which the contractors would have demanded and
which would have had to be conceded had the true facts been known. I think
they might well have paid about half its sound value."
It seems to me that Bell J. proceeded along very similar lines. We must see to
what extent, if any, Devlin J.'s approach in a breach of contract case can
properly be adopted or adapted to damages for deceit.
Mr Bannister's second submission is that there is no authority to support an
award of damages based on the difference between the value of the actual deal
and the hypothetical deal that was never in fact made. In effect he is
submitting that if it is wrong to measure damages in deceit by the contractual
basis of the loss of the bargain, it is equally wrong to assess the damages on
the basis of the loss of the bargain they might have struck with the
defendants. I shall return to this point for it is the one that has troubled
both Simon Brown L.J. and me.
His third submission is that the claimant cannot demonstrate any actual
loss flowing directly from the deceit because, far from suffering any loss, the
claimant was able to sell on the product at very considerable profit. The
claimant failed to persuade the judge to award any damages for consequential
loss i.e. for the further profits it might have made from increasing its
turnover by reducing its prices which it would have been able to do had it been
charged a fair price in the first place. Mr Bannister submits that the fact
that it might have made more profit on its actual sales if it had been able to
buy at a cheaper price is beside the point. Because it made some profit it
made no actual loss. For a long while I struggled with that submission. What
was troubling me was this. Suppose - and I hope the example does not become
too fanciful - art dealer A offers to sell to another dealer B for £1m. a
painting which A represents to B is a Manet. B is induced to believe it is a
Manet but he believes that as such he can sell it for £2M. It turns out
to be a good fake worth £1,000. The measure of damages in deceit is the
difference between the price paid (£1m.) and its actual value
(£1,000). If a contractual warranty had been given, then the measure of
damages is (with a little artistic licence) the difference between the price
paid (£1m.) and the value if it had been genuine (£2m.) If, however,
it turned out not to be a Manet but, because B was not as knowledgeable as he
thought he was, a Degas worth £1.5M., then, B might not have acquired what
he thought he was acquiring but nonetheless he suffered no loss and was fully
entitled to keep his gain of £.5m. If that were the process to apply to
this case, then Mr Bannister's argument would have some force. I believe,
however, that the fallacy in his approach is to take as the value of the
product at the date of the transaction the sale price it achieved at a much
later date. The fallacy was revealed to me by Jamal v Moolla Dawood, Sons
& Co. [1916] 1 AC 175 where the claim was for the failure by a buyer
to accept shares under a contract of sale for delivery on a specified date.
Two months after that date the sellers began to re-sell the shares on a rising
market. It was held that the profit thus accruing should not be deducted from
the damages for non-acceptance, which were to be ascertained as at the date of
the breach. Delivering the opinion of the Board, Lord Wrenbury said, at p.
180:-
"The seller's loss at the date of the breach was and remained the difference
between contract price and market price at that date. When the buyer committed
this breach the seller remained entitled to the shares, and became entitled to
damages such as the law allows. The first of these two properties, namely, the
shares, he kept for a time and subsequently sold them in a rising market. His
pocket received benefit, but his loss at the date of the breach remained
unaffected."
So too here. The claimant's profit and loss account would show the benefit but
the loss of any sum out of which they had been cheated remains recoverable.
My Approach.
In so far as I differ from Simon Brown L.J. it is in the respect that I prefer
to see whether there is any difference between the price paid and the value of
the goods at the date of the transaction. This has always been the starting
point as the judgment of Dixon J. in Toteff makes clear. Although Lord
Browne-Wilkinson spoke of the need to give "credit for any benefits which he
has received as a result of the transaction", his fourth principle explained
that, as a general rule, the benefits received by him included the market value
of the property acquired as at the date of acquisition. Although Bell J. did
not start with that approach he ended up with it. His conclusion was:-
"I do not accept Mr Bannister's argument that the product bought had no value
save what the plaintiffs paid for it. In my view its actual value to the
plaintiffs was what they would have paid for it, Bulk Price List price less
17.5%, had they not been induced to pay more by the misrepresentation. Mr Dent
said that the customers who were aware of the market pressures paid below Bulk
List prices, which was tantamount to saying that the prices which they paid,
below Bulk List, where the market value to large customers like Clef, AS and
TS.
The plaintiffs are entitled to recover by way of damages the full price paid by
them ... but they must give credit for the benefit they have received as a
result of the transaction, and in my judgment that benefit is the real value to
them of the SCI product which they bought, namely Bulk List price less
17.5%".
The real problem in the case is to establish what the value of the goods is
when there is a virtual monopoly. There is in those circumstances no
"available market" in which value can be easily established. I appreciate that
I am using a term common in the law relating to sale of goods but the
principles for establishing value in the absence of a market cannot be any
different. They are the principles expounded by Devlin J. in the
Permanite case. He was content to form a view of the sort of discount
which the contractors would have demanded and which would have had to be
conceded had the true facts been known. That is what Bell J. was doing. In
East v Maurer this court assessed damages by reference to "the
hypothetical profitable business in which the plaintiffs would have engaged but
for buying the Exeter Road business". Moreover the court proceeded on very
little substantial evidence, Beldam L.J. following Doyle v Olby
(Ironmongers) Ltd. and observing:-
"This is not a question which can be considered on a mathematical basis. It
has to be considered essentially, in the round, making what (Winn L.J.)
described as a `jury assessment' ".
The actual result in Smith New Court was to restore the decision of the
trial judge which was, with the benefit of hindsight, to ask the hypothetical
question what the open market value would have been had the truth been
known.
Conclusion.
I confess to have been worrying whether there is any meaningful difference
between, on the one hand, being put in the position one would have been in had
one not been told a lie and, on the other hand, being put in the position one
would have been in had one been told the truth. I think the answer is to
follow Lord Steyn's approach to its logical conclusion because if one is truly
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, then just before the fraudulent statement
was made the plaintiff was battling in what he believed to be honest
negotiations to ascertain the defendant's bottom line and he was denied finding
it because of the lies that were told to him. My other concern, reflecting Mr
Bannister's argument, was why, if one cannot get damages for the loss of one's
bargain, should one be allowed to get damages for the loss of the bargain one
might have made. On reflection, I think the answer to this argument is that
the loss of the bargain contemplated in breach of warranty cases is the bargain
to be made with third parties when selling on the goods whereas the bargain one
might have made if told the truth is the different bargain which might have
been struck with the defendant. I am now satisfied that so long as the
hypothetical questions are asked and answered as the means of establishing
value in the absence of a market or of any other precise means of establishing
that value, then the hypothetical approach, which is essentially what Bell J.
was adopting, is well justified by the authorities. On this basis I would
uphold Bell J.'s assessment of damages.
The Other Grounds of Appeal.
Having read my Lords' judgments, there is nothing I wish to add. In the result
I too would dismiss the appeal and the cross-appeal.
LORD JUSTICE SEDLEY:
There are, as both Mr Bannister's argument and Ward LJ's reservations have
underlined, theoretical problems surrounding Bell J's approach to the
quantification of damage. Many of them arise from the jurisprudential
distinctions between contract and tort. But it does not follow that the
proper mode of ascertaining damage in certain cases of tort may not mimic
reasoning more familiar in contract. The present case is an example.
I agree with the legal reasoning of Simon Brown LJ, which is sufficient to
answer this appeal in the respondents' favour; but I would if necessary
support it pragmatically. Mr Dent cheated Mr Gwyer: he got him to enter into
long-term contractual arrangements at a price which was mendaciously inflated.
It was, as it turned out, possible for the judge to gauge with reasonable
accuracy by how much, on his own misrepresentation, he overcharged Mr Gwyer.
Because of the misrepresentation there was no market, only a monopoly supplier.
It followed that value was collapsed into price and no external measure of
loss was available.
The choice presented by the appeal was therefore to award Mr Gwyer's companies
the damages calculated by the judge or to let them go empty-handed having
decided that they had been cheated by being overcharged. Only a lawyer could
begin to understand a form of reasoning which led to the second of these
results, and it is agreeable to be able to concur in different reasoning which
produces a result corresponding far better with justice in this particular
case.
As to the computation of interest I agree with Simon Brown LJ's reasoning and
conclusion. Like him, I would dismiss both the appeal and the
cross-appeal.
Order:
(1) Appeal dismissed with costs
(2) Cross-Appeal dismissed with costs
(3) Damages to be paid. The sum of £15,000 paid into court by the
Respondents as security for the Appellant's costs of the action, together with
all interests accrued thereon to be paid out forthwith to the Respondent's
Solicitors.
(4) The balance of any accounting costs due to the respondents from the
£30,000 on account to be paid to the respondent's solicitors within 28
days, to be held by the respondent's solicitors provided that within that time
a petition has been for permission to appeal to House of Lords; and to be held
thereafter so long as the petition remains outstanding and, If permission is
granted, pending the outcome of the appeal.
(5) Minute of this order to be filed by counsel.
(Order doe s not form part of the approved judgment)
BAILII:
Copyright Policy |
Disclaimers |
Privacy Policy |
Feedback |
Donate to BAILII
URL: http://www.bailii.org/ew/cases/EWCA/Civ/2000/161.html
