If a buyer is entitled to damages for deceit, how should they be quantified? Is a fraudulent seller liable for losses sustained as a result of commercial misjudgements on the part of the buyer, simply because they were the result of having entered into the transaction?
Glossop Cartons and Print Ltd v Contact (Print and Packaging) Ltd [2020] EWHC 1377 (Ch) is the sequel to litigation last year. Glossop had purchased a business and leases of three commercial units, after receiving assurances that a problem with flooding in one of the units was being addressed. But, after completion, it became clear that drainage was still an issue. Furthermore, the electricity supply was routed via land belonging to a third party (who was entitled to cut it off), and did not have the capacity needed for its 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 (although it had not misrepresented its capacity to the buyer).
The decision of the House of Lords in Smith New Court Securities Ltd v Citibank NA [1997] AC 254 established that 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. However, those damages must be assessed on the basis that the innocent claimant acts reasonably to mitigate its loss and is not entitled to recover losses that were factored into the purchase price.
How did these principles operate on the facts of this case? What is the position if an innocent buyer identifies and weighs up certain risks before entering into the transaction – and gets its figures wrong? The judge decided that financial consequences flowing from an erroneous commercial assessment, wholly unrelated to the fraud, cannot properly be laid at the seller’s door – even though its fraudulent misrepresentations induced the buyer to enter into the transaction.
The judge explained that the buyer had known that it was acquiring a loss-making business and should not be allowed to take advantage of its own commercial misjudgement. It had falsely assumed that the two businesses would integrate together smoothly and had taken the view that good management would eliminate any need for off-site storage costs. But it had overreached itself and had not obtained the volume of orders that it had hoped for, quite independently of the problems with the unit. There was no causal link between the fraudulent misrepresentations and its lower turnover/the cost of its off-site storage charges. They were not the direct result of and did not flow from its entry into the transaction.
Glossop had also made some “back of the envelope” calculations about the cost of conversion work that it was contemplating and came up with an “under-guesstimate”. But the judge took the view that the projected cost had not affected the price paid for the assets and ruled that the higher than expected conversion costs were irrecoverable.
The judge’s comments will enable the parties to calculate the damages payable to the buyer, and will help to shape claims made and defences advanced by those embroiled in similar litigation.
Allyson Colby, property law consultant