A defendant who induces a claimant to enter into a transaction by a fraudulent misrepresentation must make full reparation for the damage directly flowing from the transaction, as well as covering the cost of any consequential losses caused by the transaction. But damages must be assessed on the basis that the claimant takes all reasonable steps to mitigate its loss: Smith New Court Securities Ltd v Citibank NA [1997] AC 254.
Do these rules enable the victims of fraudulent misrepresentation to recover the cost of their own bad bargains? The litigation in Glossop Cartons and Print Ltd v Contact (Print and Packaging) Ltd [2021] EWCA Civ 639 resulted from the sale and purchase of a printing business. The transaction included leases of three commercial units – one of which had been prone to flooding, due to drainage problems. The buyer had expressed concern about the issue and was assured that the problem had been addressed. But it subsequently became clear that it had not been resolved. In addition, the electricity supply was routed via land belonging to a third party – who was entitled to cut it off. And, to make matters worse, it did not have the capacity needed for the buyer’s printing machines.
In the proceedings that followed, the High Court ruled that the seller was liable for damages because it had made fraudulent misrepresentations about the drainage – and also about the electricity supply (albeit not about its capacity). How then were the damages to be quantified? The trial judge observed that the buyer had known that it was acquiring a loss-making business and, having noted the commercial misjudgements made by the buyer, ruled that financial consequences flowing from its erroneous commercial assessment, which were wholly unrelated to the fraudulent misrepresentations, could not be laid at the seller’s door. That would be to overcompensate the buyer for the consequences of the seller’s fraud.
But the Court of Appeal has ruled that this was wrong. In assessing damages, the victim of fraudulent misrepresentation is entitled to recover the full price paid for an asset, but must give credit for any benefits received as a result of the transaction. And, as a general rule, the benefits received include the market value of the property acquired as at the date of acquisition. In other words, victims of fraudulent misrepresentation are entitled to the difference between the price paid and its market value. And the market value for the purposes of the calculation of direct loss is evaluated objectively – and not by reference to what the claimant might or might not subjectively have thought about what it was buying at the time.
This means that claimants seeking damages for fraudulent misrepresentation can be compensated for making a bad bargain, even if they knew or ought to have known about defects in what they were buying before they entered into the transaction, and without sums being deducted from the damages payable in respect of any miscalculations that they may have made when entering into the transaction – because their commercial judgments and misjudgments are irrelevant to the evaluation of what direct loss they have suffered. Consequently, the buyer was entitled to recover the £300,000 that it had paid for goodwill that had no real value, in addition to the other financial awards that the trial judge had made.
Allyson Colby is a property law consultant
