[1996] 4 All ER 769
House of Lords
SNC purchased shares in Ferranti from SVAM, who acted as agents for Citibank, at 82.25p per share. SNC were originally only willing to pay 78p per share but were persuaded to pay the higher price by the fraudulent misrepresentation of SVAM that there was another buyer who was willing to pay more for the shares; there was, in fact, no such other buyer. The total price paid for the shares was £23,146,321. Soon after the purchase of the shares the share price slumped to 44p per share because of a fraud that had been perpetrated on Ferranti by a third party, Guerin; this fraud was unconnected with the share purchase. Having established there had been a fraudulent misrepresentation the issue before the House of Lords was the measure of damages payable to SNC.
Lord Browne-Wilkinson
The damages issue which is the subject matter of the appeal raises for decision for the first time in your Lordships' House the question of the correct measure of damages where a plaintiff has acquired property in reliance on a fraudulent misrepresentation made by the defendant...
... [T]he only claim by Smith has been for damages for deceit. Both before the trial judge, Chadwick J, and the Court of Appeal, Nourse, Rose and Hoffmann LJJ, the argument proceeded on the basis that, where a fraudulent misrepresentation has induced the plaintiff to enter into a contract of purchase, the measure of damages is, in general, the difference between the contract price and the true open market value of the property purchased, valued as at the date of the contract of purchase. This was the law as laid down in a series of cases decided at the end of the 19th century, usually in relation to shares purchased in reliance on a fraudulent prospectus: see Twycross v Grant; Waddell v Blockey; Peek v Derry and subsequently treated as settled law by the Court of Appeal in McConnel v Wright. It was common ground that there was one exception to this general rule: where the open market at the transaction date was a false market, in the sense that the price was inflated because of a misrepresentation made to the market generally by the defendant, the market value is not decisive: in such circumstances the "true" value as at the transaction date has to be ascertained but with the benefit of hindsight: McConnel v Wright...
As to the second rule referred to by the Court of Appeal - the rule requiring damages to be assessed as at the date of the transaction - Mr Grabiner, for Smith, submitted that the basis on which the 19th century cases were decided was erroneous and that later decisions show the right approach to the assessment of damages. I agree with those submissions and rather than consider the sterilities of the argument surrounding the 19th century cases proceed at once to consider the more modern law...
The decision which restated the law correctly is Doyle v Olby (Ironmongers) Ltd...
Doyle v Olby (Ironmongers) Ltd establishes four points. First, that the measure of damages where a contract has been induced by fraudulent misrepresentation is reparation for all the actual damage directly flowing from (ie. caused by) entering into the transaction. Second, that in assessing such damages it is not an inflexible rule that the plaintiff must bring into account the value as at the transaction date of the asset acquired: although the point is not adverted to in the judgments, the basis on which the damages were computed shows that there can be circumstances in which it is proper to require a defendant only to bring into account the actual proceeds of the asset provided that he has acted reasonably in retaining it. Third, damages for deceit are not limited to those which were reasonably foreseeable. Fourth, the damages recoverable can include consequential loss suffered by reason of having acquired the asset.
In my judgment Doyle v Olby (Ironmongers) Ltd. was rightly decided on all these points...
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...
How then do those principles apply in the present case? First, there is no doubt that the total loss incurred by Smith was caused by the Roberts fraud, unless it can be said that Smith's own decision to retain the shares until after the revelation of the Guerin fraud was a causative factor. The Guerin fraud had been committed before Smith acquired the shares on 21 July 1989. Unknown to everybody, on that date the shares were already pregnant with disaster. Accordingly when, pursuant to the Roberts fraud, Smith acquired the Ferranti shares they were induced to purchase a flawed asset. This is not a case of the difficult kind that can arise where the depreciation in the asset acquired between the date of acquisition and the date of realisation may be due to factors affecting the market which have occurred after the date of the defendant's fraud. In the present case the loss was incurred by reason of the purchasing of the shares which were pregnant with the loss and that purchase was caused by the Roberts fraud.
Can it then be said that the loss flowed not from Smith's acquisition but from Smith's decision to retain the shares? In my judgment it cannot. The judge found that the shares were acquired as a market-making risk and at a price which Smith would only have paid for an acquisition as a market-making risk. As such, Smith could not dispose of them on 21 July 1989 otherwise than at a loss. Smith were in a special sense locked into the shares having bought them for a purpose and at a price which precluded them from sensibly disposing of them. It was not alleged or found that Smith acted unreasonably in retaining the shares for as long as they did or in realising them in the manner in which they did.
In the circumstances, it would not in my judgment compensate Smith for the actual loss they have suffered (ie. the difference between the contract price and the resale price eventually realized) if Smith were required to give credit for the shares having a value of 78p on 21 July 1989. Having acquired the shares at 82p for stock Smith could not commercially have sold on that date at 78p. It is not realistic to treat Smith as having received shares worth 78p each when in fact, in real life, they could not commercially have sold or realised the shares at that price on that date. In my judgment, this is one of those cases where to give full reparation to Smith, the benefit which Smith ought to bring into account to be set against its loss for the total purchase price paid should be the actual resale price achieved by Smith when eventually the shares were sold...
For these reasons I would hold that the damages recoverable amount to £11,352,220 being the difference between the contract price and the amount actually realised by Smith on the resale of the shares. However, as there was no appeal by Smith against the judge's assessment of the damages at £10,764,005, Smith's claim must be limited to that latter amount. I would therefore allow the appeal and restore the judge's order.