Fraudulent Misrepresentation

“Though speak’st like him’s untutored to repeat: Who makes the fairest show means most deceit”.

[William Shakespeare]

Deceit and Loss

When deceit is practised and damage results how is that loss to be calculated?

This was a question which the Court of Appeal was asked to decide in the reported case of Glossop Cartons and Print Limited and Others (G) v Contact (Print & Packaging) Limited and Others (C) [2021] EWCA – Civ639.

  1. The Facts

The brief facts were these: the Claimants [G] had claimed damages from C for their fraudulent misrepresentations.

G contended that they had been misled into buying business assets from C on account of C’s fraudulent misrepresentations.  (In other words G argued that important statements had been made by C which C knew to be untrue and which had induced G to go ahead with their purchase).

G contended that as result they had suffered loss in that the value of the business had been overstated.

This was an Appeal by G against an Order of the Judge in the Chancery Division on the question as to how G’s loss was to be measured.

  • Loss : Chancery

In seeking to ascertain loss the Chancery Division sought to deduct from the purchase price paid certain expenses which G had not “factored in” to their price calculations.  The Chancery Division did so in order to arrive at the actual market value of the assets acquired.

  • Appeal

The main question on the Appeal was whether this approach (“the deduction method”) was supportable as a matter of law.

Their Lordships in the Court of Appeal decided not.

  • Judgment : Court of Appeal

The Court of Appeal in its Judgment found as follows: –

  • The deduction method was wrong in principle.  Apart from being unduly complex it inappropriately required the Court to consider what subjectively a Claimant might or might not have “factored in” when calculating the purchase price to be paid.  Such considerations were not relevant to the calculation of loss for fraudulent misrepresentation.
  • In a claim for damages for fraudulent misrepresentation the correct approach was for the Court to ascertain (on the evidence) the actual value of the assets purchased at the relevant date and to deduct therefrom the price actually paid.
  • The Court of Appeal provided helpful clarification also.  It stated that Claimants seeking damages for a 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 had actually entered into the transaction.
  • The benefits received by the Buyer from the transaction were to be determined objectively – not subjectively.
  • Direct and Consequential Losses

There may be two elements of loss to consider:

  • Direct loss.  In this case, this comprised the difference between the true market value and the actual price which G had paid. 
  • There may also be consequential loss arising.  In order to succeed on such a claim such loss had to flow directly from the transaction caused by it and be quite unaffected by any failure by the Claimant [G] to mitigate loss [i.e. any failure to take reasonable steps to reduce exposure to damage].
  • Subjective factors not relevant: not relevant

The Court below might have approached matters in this way: on the facts the Court could have said that C had paid £300,000 for the goodwill of a heavily loss-making business.  It may have been foolish so to do.  It may have been the result of commercial misjudgement or over – optimism.

Either way, whatever G might or might not have thought about the commercial wisdom of the purchase price – when it bought assets as an innocent buyer under a contract induced by fraud – was nothing to the point

The innocent and injured buyer was entitled to recover, by way of direct loss, the difference between the price it had paid and the market value of the asset bought at the relevant date.

In this case, that difference was best represented by the £300,000 which G had paid for goodwill which, in reality, had possessed no real value.