Glossop Cartons and Print Ltd and ors v Contact (Print & Packaging) Ltd and ors

Damages – Fraudulent misrepresentation – Loss – Appellants induced to enter agreements for purchase of business assets by fraudulent misrepresentations of respondents – High court awarding damages adopting deduction method – Appellants appealing – Whether court adopting correct approach to assessment of direct loss caused by fraudulent misrepresentation – Whether causal link required for consequential loss – Appeal allowed – Cross-appeal dismissed The first appellant was a printing business owned by the second appellant. The first respondent was a printing business, owned by the second and third respondents. The parties entered into three simultaneous transactions under which the appellants purchased the business and the leases of three commercial units from the respondents. Prior to the purchase agreements, there were concerns that one of the units was prone to flooding because of a drainage problem, but the respondents assured the appellants that the problem was being addressed. There were also concerns about the electricity supply. After the transactions were complete, the appellants discovered that the problems had not been resolved. They complained that the respondents had fraudulently misrepresented the position to induce them to enter into the agreements. The High Court held that the appellants would not have entered into the agreements in the form they had but for the misrepresentations and the appellants were entitled to recover damages. The judge noted that the appellants had known that they were acquiring a loss-making business and financial consequences flowing from its erroneous commercial assessment, which were unrelated to the fraudulent misrepresentations, could not be laid at the respondents’ door. The correct approach to assessing damages was to compensate the appellants for the fact that the unit suffered from an inadequate power supply, but not to insulate them from potential commercial risks that they had appreciated and factored in to the purchase price, as that would overcompensate them for the consequences of the fraud: [2019] EWHC 2314 (Ch). The appellants appealed contending that the judge failed to award damages for the direct loss caused by the fraudulent misrepresentations, namely the difference between the actual market value of the business assets sold under the asset sale agreement and the price paid. The respondents cross-appealed, challenging the damages awarded to the appellants. Held: The appeal was allowed. The cross-appeal was dismissed. (1) In assessing damages, the victim of fraudulent misrepresentation was entitled to recover the full price paid for an asset, but had to give credit for any benefits received as a result of the transaction. As a general rule, the benefits received included the market value of the property acquired as at the date of acquisition. But such a rule was not to be inflexibly applied where to do so would prevent him obtaining full compensation for the wrong suffered: Smith New Court Securities Ltd v Scrimgeour Vickers (Asset Management) Ltd [1997] AC 254 applied. (2) The judge had adopted a “deduction method” of determining the market value by deducting from the price the cost of every flaw or defect that the appellants had not themselves factored into their calculation of that price but thought that certain crucial flaws or defects could not be deducted from the purchase price. Potential losses and commercial risks which the appellants had appreciated and factored into the purchase price could not be deducted; nor could losses sustained as a result of commercial mis-judgements on the part of the innocent purchaser which were wholly unrelated to the fraud of the seller. However, the deduction method was wrong in principle. Apart from being unduly complex, it inappropriately required the court to consider what subjectively the appellants might or might not have factored in to their calculation of the purchase price. Such matters were irrelevant to the calculation of direct loss for fraudulent misrepresentation which in the normal case, such as the present, merely required the court to ascertain on the evidence the actual value of the assets purchased at the relevant date and to deduct that figure from the price paid. The judge fell into error in adopting the deduction method and in the way he applied it. The appellants were entitled to the difference between the price paid and the market value, whatever miscalculations they might have made in entering into the transaction. Claimants seeking damages for fraudulent misrepresentation could 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. A purchaser’s commercial judgments and mis-judgments were irrelevant to the evaluation of what direct loss it suffered. The benefits received by the buyer were to be determined objectively, not subjectively. The market value for the purposes of the calculation of direct loss was evaluated objectively and not by reference to what the claimant might or might not have thought about what it was buying at the time. (3) An alternative “broad brush” approach should have been adopted by the judge to determine the direct loss in the present case which resulted in a valuation for the overpayment at £300,000 on the basis that £750,000 for plant and machinery and £203,000 for stock and work-in-progress were concrete assets out of a purchase price of £1,253,085.63; it was hard to see how there could be any goodwill in a massively loss-making business. The judge ought not, insofar as he did, to have speculated either about what the appellants would have done if the fraudulent misrepresentations had not been made or had been true. So far as consequential loss was concerned, the appellants did not question the judge’s specific findings. It would, however, have been wrong to require a causal link between the fraudulent misrepresentations and the loss. A causal link between entering into the transaction and the consequential loss claimed was what had to be established. Therefore, the judge was mistaken in his approach to the assessment of the appellants’ loss. What the appellants might or might not have thought about what they were paying, when they bought assets as innocent purchasers under a contract induced by fraud, was nothing to the point. They were entitled to recover, by way of direct loss, the difference between the price paid and the market value of the assets purchased at the relevant date. In the circumstances of this case, that difference was the £300,000 which the appellants paid for goodwill (seemingly mostly for business contracts) that had no real value. Those damages were in addition to the other financial awards made by the judge. Thomas Grant QC and Ryan James Turner (instructed by Davis Blank Furniss, of Manchester) appeared for the appellants; Neil Berragan (instructed by Squire Patton Boggs (UK) LLP) appeared for the respondents. Eileen O’Grady, barrister Click here to read a transcript of Glossop Cartons and Print Ltd and others v Contact (Print & Packaging) Ltd and others