#6618 - Smith New Court Securities V. Vickers - Commercial Remedies BCL

Smith New Court Securities v. Vickers

Facts

On 21 July 1989 an employee of the second defendant, which was acting as broker for the first defendant, made representations, subsequently discovered to be false, that in buying shares in a public company the plaintiff would be competing with two other bidders, that he would disclose the competing bids after the plaintiff had made its bid and that two other named companies had made bids. The plaintiff bought 28,141,424 shares in the company at 82 p each with a view to holding them as a market-making risk and selling them when an appropriate opportunity arose. By September 1989 it became known that a fraud had been perpetrated on the company, which caused a slump in the value of its shares. Between 20 November 1989 and 30 April 1990 the plaintiff sold the shares in small parcels for a total of just over 11m. It brought an action against both defendants for damages.

Holding

Lord Browne Wilkinson

In sum, in my judgment the following principles apply in assessing the damages payable where the plaintiff has been induced by a fraudulent misrepresentation to buy property: (1) the defendant is bound to make reparation for all the damage directly flowing from the transaction; (2) although such damage need not have been foreseeable, it must have been directly caused by the transaction; (3) in assessing such damage, the plaintiff is entitled to recover by way of damages the full price paid by him, but he must give credit for any benefits which he has received as a result of the transaction; (4) as a general rule, the benefits received by him include the market value of the property acquired as at the date of acquisition; but such general rule is not to be inflexibly applied where to do so would prevent him obtaining full compensation for the wrong suffered; (5) although the circumstances in which the general rule should not apply cannot be comprehensively stated, it will normally not apply where either (a) the misrepresentation has continued to operate after the date of the acquisition of the asset so as to induce the plaintiff to retain the asset or (b) the circumstances of the case are such that the plaintiff is, by reason of the fraud, locked into the property. (6) In addition, the plaintiff is entitled to recover consequential losses caused by the transaction; (7) the plaintiff must take all reasonable steps to mitigate his loss once he has discovered the fraud.

Difference between contractual damages and damages for misrepresentation

Before seeking to apply those principles to the present case, there are two points I must make. First, in Downs v. Chappell [1997] 1 W.L.R. 426, Hobhouse L.J. having quantified the recoverable damage very much along the lines that I have suggested, sought to cross-check his result by looking to see what the value of the business would have been if the misrepresentations had been true and then comparing that value to the contract price. Whilst Hobhouse L.J. accepted that this was not the correct measure of damages, he was seeking to check that the plaintiff was not being compensated for a general fall in market prices (for which the defendant was not accountable) rather than for the wrong done to him by the defendant. In my view, such a cross-check is not likely to be helpful and is conducive to over-elaboration both in the evidence and in argument.

Lord Steyn

Difference between damages in contract and fraudulent misrepresentation

Eventually, the idea took root that an intentional wrongdoer is not entitled to the benefit of the reasonable foreseeability test of remoteness. He is to be held liable in respect of "the actual damage directly flowing from the fraudulent inducement:" see the obiter dictum of Lord Atkin in Clark v. Urquhart[1930] A.C. 28 , 68: and compare dicta of Dixon J. in Potts v. Miller (1940) 64 C.L.R. 282 , 298-299, and in Toteff v. Antonas (1952) 87 C.L.R. 647 , 650. It was, however, not until the decision of the Court of Appeal in Doyle v. Olby (Ironmongers) Ltd.[1969] 2 Q.B. 158 that the governing principles were clearly laid down. By fraudulent misrepresentation the defendant induced the plaintiff to buy a business. The trial judge awarded damages to the plaintiff on the basis of a contractual measure of damages, i.e. the cost of making good the representations. The Court of Appeal ruled that this was an error and substituted a higher figure assessed on the basis of the tort measure, i.e. restoration of the status quo ante.

Summary of General Rules

The logic of the decision in Doyle v. Olby (Ironmongers) Ltd. justifies the following propositions:

(1) The plaintiff in an action for deceit is not entitled to be compensated in accordance with the contractual measure of damage, i.e. the benefit of the bargain measure. He is not entitled to be protected in respect of his positive interest in the bargain.

(2) The plaintiff in an action for deceit is, however, entitled to be compensated in respect...