In a recent leading case, the Court of Appeal has visited again the vexed question of the measure of damages that will flow after a finding of fraudulent misrepresentation.
“Fraudulent misrepresentation” arises when a prospective contracting party misrepresents a fact to the other party intending that the other party should rely on it in entering into the contract, which the other party does and loss is caused by the misrepresentation. Consumers might come across this as product mis-selling but fraudulent misrepresentation is a common claim in contract and is often reflected in a claim in deceit.
The Court of Appeal has clarified the correct measure of damages for fraudulent misrepresentation in its recent judgment of Glossop Cartons and Print Ltd and others v Contact (Print & Packaging) Ltd and others  EWCA Civ 639 (Glossop). The Court of Appeal held that, as a general principle, the proper approach for calculating damages for fraudulent misrepresentation should be to (1) ascertain the actual value of the assets bought at the relevant date and (2) deduct that figure from the price paid. The Court of Appeal’s decision is important because it indicates that this method will be the general approach applied when assessing damages for fraudulent misrepresentation.
What is the Glossop case about?
The claimant (Glossop), entered into an asset sale agreement and lease sale agreement for the purchase of the business assets of a loss-making print company and a property lease owned by Mr Smith and a pension company. The claimant later issued proceedings against the defendants (the print company, Mr Smith and the pension company), claiming that it had been induced to enter the agreements by the fraudulent misrepresentations of Mr Smith about the property.
The High Court ruled in favour of the claimant. It applied a “deduction method” to calculate the market value of the business assets sold and then deducted from the price paid every defect or flaw that the claimant had not accounted for in its calculation of the purchase price. It also held that in claims of deceit the claimant could not recover for losses which directly flowed from a transaction if those losses were a result of the claimant’s own commercial misjudgement. In doing so, the High Court found that some crucial defects could not be deducted from the purchase price.
The claimant appealed the High Court’s decision arguing that a simpler methodology should have been adopted to assess damages instead of the deduction method and that the High Court had also failed to award damages for the direct loss (the difference between the actual market value of the business assets and the actual price paid) caused by the fraudulent misrepresentations, which it calculated to be £300,000.
The Court of Appeal allowed the claimant’s appeal. The Court of Appeal was critical of the deduction method adopted by the High Court to quantify the damages for fraudulent misrepresentation and said that the deduction method was “wrong in principle”, “unduly complex” and inappropriate as it requires the court to consider what subjectively the claimant had factored into its assessment of the purchase price. The Court of Appeal also affirmed that, in a normal case of fraudulent misrepresentation, the direct loss was simply a calculation of the difference between the price paid and the market value of the asset bought at the transaction date. The purchaser’s commercial misjudgements are irrelevant to the evaluation of what direct loss it suffered. The Court of Appeal replaced the High Court’s findings with an award of £300,000 losses (1) flowing directly from the transaction; (2) caused by it; and (3) unaffected by any failure by the claimants to mitigate.
For direct loss, the claimant was able to recover the difference between the price it paid and the market value of the assets purchased at the relevant date which was best represented by the £300,000 which Glossop paid for goodwill (mainly for business contracts) that had no real value on the basis that it was difficult to determine how there could be any goodwill in a loss-making business.
What impact does the Glossop decision have?
The Court of Appeal’s decision in Glossop reinforces a simpler approach to assessing damages for fraudulent misrepresentation and establishes this principle as the general approach to be applied in such claims. The Glossop decision also highlights that claimants seeking damages for fraudulent misrepresentation may well be compensated for making a bad commercial judgement, even if they knew, or ought to have known, about defects in what they were buying before they entered into the transaction.
Going forward, the Court of Appeal’s Glossop decision will have a broad impact on the assessment on damages for fraudulent misrepresentation in very many claims. For example, this simpler approach of assessing damages will be relevant in:
- claims based on the tort of deceit brought under section 90A of the Financial Services and Markets Act 2000 (FSMA);
- claims founded in the tort of deceit, chiefly in shareholder claims and mis-selling disputes; and
- securities litigation, in the context of claims regarding alleged fraudulent misrepresentation at common law.
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