Deceit – Fraudulent misrepresentation – Loss of profits – Second appellant broker falsely representing profitability of respondent’s trade – Respondent seeking damages for deceit – Court awarding damages for loss of profit between discovery of misrepresentation and trial of action – Whether appellants liable for damages in respect of hypothetical use of funds of which defrauded – Appeal dismissed
The respondent company (the second claimant in the original claim) traded in stocks, shares and derivatives. The first appellant financial institution employed the second appellant as a broker. The respondent engaged in trading through the first appellant in contracts for differences; the second appellant was responsible for the respondent’s account. The second appellant made fraudulent misrepresentations to the respondent concerning the profitability of its trading and the amount of money in its account. The respondent continued to trade for seven months before the true position was discovered.
The parties agreed that the difference between the respondent’s available investment funds at the beginning and end of that period was £3.222m. The appellants accepted that if the respondent could establish liability, it would be entitled to recover that sum plus interest. However, the respondent claimed that it had suffered a substantially greater loss, owing to the loss of: (i) the opportunity to have traded with the fund during the seven-month period as it would otherwise have done (stage 1); and (ii) opportunities for trading during the period from the termination of its relationship with the first appellant until the trial (stage 2).
The judge held that the respondent was entitled to damages for deceit representing loss of profits in respect of both periods, but he granted the appellants permission to appeal on the question of whether the respondent was entitled to recover damages for loss of profits that it would otherwise have made from use of the funds of which it had been defrauded: [2009] EWHC 901 (Comm); [2009] 2 All ER (Comm) 589. The appellants argued that the respondent’s loss should have been assessed from the date at which the depletion of its trading fund was discovered. The respondent argued that the depletion of its trading fund was a fait accompli, from which it could not extract itself and which had a continuing direct effect on its ability to trade profitably.
Held: The appeal was dismissed.
It was possible that a defendant’s fraud might have a continuing effect after a transaction had been completed and any loss based on the hypothetical use of the funds of which it had been defrauded could be recovered as damages in deceit and was not necessarily too remote: Smith New Court Securities Ltd v Citibank NA [1997] AC 254 considered.
The appellants had not shown any principled reason why the discovery of the fraud should be taken as a legal cut-off point that terminated the respondent’s claim for damages in respect of its loss of investment opportunity resulting from the appellants’ fraud. Applying the fundamental compensatory principle, the judge had correctly held that the respondent was entitled in principle to recover damages in respect of that loss of investment opportunity until the trial.
There was no critical difference between the recoverability of damages for the loss of use of property resulting from tortious interference with property rights and the loss of use of money resulting from deceit: Sempra Metals Ltd (formerly Metallgesellschaft Ltd) v Commissioners of Inland Revenue [2007] UKHL 34; [2008] 1 AC 561 considered.
The respondent’s first head of loss was the amount of its direct loss on trades that it was induced to enter following the second appellant’s fraud. That loss was recoverable regardless of what the respondent would otherwise have done with its trading fund. If the respondent would not have made profitable alternative use of the money, no head of consequential loss would arise for which it would be entitled to receive compensation. However, if it would have done so, a potential head of consequential loss might arise for which, subject to remoteness, the respondent would be entitled to damages on the normal compensatory principle. There was no asymmetry or injustice in that.
Ali Malek QC, Jeffrey Chapman QC and Adam Kramer (instructed by Legal First) appeared for the appellants; Neil Kitchener QC and Steven Elliott (instructed by Gordon Dadds) appeared for the respondent.
Eileen O’Grady, barrister
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