House of Lords
Session 1996-97
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Judgments - Smith New Court Securities v. Scrimgeour Vickers


  Lord Browne-Wilkinson   Lord Keith of Kinkel   Lord Mustill
Lord Slynn of Hadley   Lord Steyn







My Lords,

    I have had the advantage of reading in draft the speech to be delivered by my noble and learned friend, Lord Steyn. As to the issue of liability raised by the cross-appeal, I agree with his reasoning and conclusions: I would restore the judge's finding that Smith New Court Securities Ltd. ("Smith") had established that Citibank N.A. (through Mr. Roberts) fraudulently induced Smith to purchase the Ferranti shares by making the second and third representations, but not the first representation.

    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. The position in the present case is complicated by the fact that there are two frauds involved. The first, "Roberts fraud," is the fraudulent representation made by Mr. Roberts on behalf of Citibank on 21 July 1989 which induced Smith to buy 28,141,424 Ferranti shares for £23,141,424. The second, "Guerin fraud," is the fraud practised by Mr. Guerin on Ferranti. Although the Guerin fraud was committed before 21 July 1989, its existence was unknown to Citibank, Smith, Ferranti and the market until after that date. Shortly stated the question is who should bear the risk of the Guerin fraud: Smith (which still held the Ferranti shares when the Guerin fraud was discovered) or Citibank which by its servant had fraudulently induced Smith to buy the Ferranti shares.

    The relevant facts lie within a comparatively narrow compass. The judge held that Smith bought the Ferranti shares at 82¼p as a market making risk, i.e. with a view to holding them on its books over a comparatively long period to be sold on at a later date. He further held that Smith would not have bought at that price at all apart from the Roberts fraud. Such a purchase is to be contrasted with a "bought deal" where the market maker buys the shares with a view to its agency branch selling them on in smaller parcels to its clients, such sales usually taking place within a matter of hours. The judge held that, if Smith had been considering a bought deal, it could not have bid more than 78p, at which price Citibank would not have sold to Smith. From these facts, two points emerge: first, as a result of the Roberts fraud Smith bought the Ferranti shares with a view to holding them for a comparatively long period; second, if Smith had bid on the basis of a bought deal, it would not have acquired the shares.

    The history of the Ferranti shares subsequent to 21 July 1989 was as follows. On 11 August 1989 Ferranti published its Annual Reports and Accounts for the year ending 31 March 1989 which confirmed the results stated in a preliminary announcement made on 14 July 1989. On 11 September 1989 the directors of Ferranti announced that information had come to their attention which required a restatement of the 1989 accounts. At their request dealing in Ferranti shares was suspended. On 29 September the Chairman of Ferranti wrote to the shareholders telling them that Ferranti had been the victim of a major fraud by Mr. Guerin. Trading in Ferranti shares resumed on 3 October. On 17 November Ferranti published its revised audited accounts which showed that the effect of the Guerin fraud was even worse than had been thought.

    Smith had retained all the Ferranti shares which it had bought on 21 July. But from 20 November 1989 onwards Smith began to trickle these shares onto the market and obtained prices ranging from 49p down to 30p. By 30 April 1990 it had sold them all for a total of £11,788,204, i.e. at a loss of £11,353,220. It was not suggested at the trial that Smith's retention of the shares until November 1989 or their subsequent sales were in any way unreasonable.

    The judge found that Smith first learned of Mr. Roberts fraud on 5 December 1989 although there was evidence to suggest that by mid-November 1989 Smith was suspicious of the truth of Mr. Roberts' representations. On 2 January 1990 solicitors for Smith wrote to Citibank purporting to rescind the contract for the purchase of the 28m. Ferranti shares. At the trial, the claim to rescind was persisted in until the closing speech for Smith when it was expressly abandoned for reasons not examined before your Lordships. Thereafter the only claim by Smith has been for damages for deceit. Both before the trial judge, Chadwick J. [1992] B.C.L.C. 1104, and the Court of Appeal, Nourse, Rose and Hoffmann L.JJ. [1994] 1 W.L.R. 1271, 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 (1877) 2 C.P.D. 469; Waddell v. Blockey (1879) 4 Q.B.D. 678; Peek v. Derry (1887) 37 Ch.D. 541 and subsequently treated as settled law by the Court of Appeal in McConnel v. Wright [1903] 1 Ch. 546. 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.

    Now in the present case the market value of the Ferranti shares at the transaction date (21 July 1989) was inflated, since the existence of the Guerin fraud was then unknown: there was, in one sense, a false market. But that false market was not attributable to the fraud of the defendant, Citibank: the Roberts fraud had no impact on the open market price. The difference between Chadwick J. and the Court of Appeal lay in the fact that Chadwick J. held that there was a latent defect (i.e. the Guerin fraud) in the Ferranti shares and that, even though the false market was not due to the fraud of Citibank, he had to find the "true" value of the Ferranti shares, using hindsight. He accordingly valued the Ferranti shares at what would have been their open market value had the market known of the Guerin fraud on 21 July 1989. The judge fixed this value at 44p per share giving a total true value of the shares on the transaction date of £12,382,226. He accordingly awarded as damages the difference between the contract price and that figure, i.e. £10,764,005.

    The Court of Appeal on the other hand took the view that it was only legitimate, in the case of quoted shares, to depart from the market price as at the transaction date where that price was falsified by the defendant's misrepresentation. In all other cases the market value has to be taken to be the quoted value. The Court of Appeal therefore reduced the damages to £1,196,010, being the difference between the contract price and the value of the shares at 78p a share, being the value at which on 21 July Smith itself would have been prepared to buy. The Court of Appeal was conscious that, in so holding, they were throwing the whole risk of catastrophic events onto the innocent purchaser rather than the fraudulent vendor. But they held that such injustice stemmed from the rigidity of two rules (both of which had been common ground before them): first, the denial of rescission where a plaintiff cannot return in specie the very shares which were the subject matter of the fraudulent sale; second, the rule which requires the damages to be calculated as at the date of sale.

    As to the first rule referred to by the Court of Appeal, the reasons why Smith abandoned their claim to rescind were not explored before your Lordships. I will therefore say nothing about the point save that if the current law in fact provides (as the Court of Appeal thought) that there is no right to rescind the contract for the sale of quoted shares once the specific shares purchased have been sold, the law will need to be closely looked at hereafter. Since in such a case other, identical, shares can be purchased on the market, the defrauded purchaser can offer substantial restitutio in integrum which is normally sufficient.

    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.

    As ever in considering damages in tort, the starting point must be to repeat, yet again, the well-known statement of Lord Blackburn in Livingstone v. Rawyards Coal Co. (1880) 5 App.Cas. 25, 39:

     "I do not think there is any difference of opinion as to its being a general rule that, where any injury is to be compensated by damages, in settling the sum of money to be given for reparation of damages you should as nearly as possible get that sum of money which will put the party who has been injured, or who has suffered, in the same position as he would have been in if he had not sustained the wrong for which he is now getting his compensation or reparation."

    To that statement he added these important words which are less frequently quoted:

     "That must be qualified by a great many things which may arise--such, for instance, as by the consideration whether the damage has been maliciously done, or whether it has been done with full knowledge that the person doing it was doing wrong. There could be no doubt that there you would say that everything would be taken into view that would go most against the wilful wrongdoer--many things which you would properly allow in favour of an innocent mistaken trespasser would be disallowed as against a wilful and intentional trespasser on the ground that he must not qualify his own wrong, and various things of that sort."

    In Clark v. Urquhart [1930] A.C. 28, 67-68 Lord Atkin cast doubt on whether the measure of damages laid down in the 19th century cases as summarised in McConnel v. Wright (supra) was correct. He said:

     "I find it difficult to suppose that there is any difference in the measure of damages in an action of deceit depending upon the nature of the transaction into which the plaintiff is fraudulently induced to enter. Whether he buys shares or buys sugar, whether he subscribes for shares, or agrees to enter into a partnership, or in any other way alters his position to his detriment, in principle, the measure of damages should be the same, and whether estimated by a jury or a judge. I should have thought it would be based on the actual damage directly flowing from the fraudulent inducement. The formula in McConnel v. Wright may be correct or it may be expressed in too rigid terms. I reserve the right to consider it if it should ever be in issue in this House."

    In the High Court of Australia, Dixon J. in Potts v. Miller (1940) 64 C.L.R. 282, 299-300, whilst loyally applying the old inflexible rule was plainly unhappy with it: see also Toteff v. Antonas (1952) 87 C.L.R. 647.

    The decision which restated the law correctly is Doyle v. Olby (Ironmongers) Ltd. [1969] 2 Q.B. 158. In that case the plaintiff had been induced by the fraudulent misrepresentation of the defendant to buy an ironmonger's business for £4,500 plus stock at a valuation of £5,000. Shortly after the purchase, he discovered the fraud and started the action. But despite this he had to remain in occupation: "he had burned his boats and had to carry on with the business as best he could." After three years, he managed to sell the business for £3,700, but in the meantime he had incurred business debts. Lord Denning M.R., after referring to Lord Atkin's dictum, stated the principle as follows, at p. 167:

     "On principle the distinction seems to be this: in contract, the defendant has made a promise and broken it. The object of damages is to put the plaintiff in as good a position, as far as money can do it, as if the promise had been performed. In fraud, the defendant has been guilty of a deliberate wrong by inducing the plaintiff to act to his detriment. The object of damages is to compensate the plaintiff for all the loss he has suffered, so far, again, as money can do it. In contract, the damages are limited to what may reasonably be supposed to have been in the contemplation of the parties. In fraud, they are not so limited. The defendant is bound to make reparation for all the actual damages directly flowing from the fraudulent inducement. The person who has been defrauded is entitled to say: 'I would not have entered into this bargain at all but for your representation. Owing to your fraud, I have not only lost all the money I paid you, but, what is more, I have been put to a large amount of extra expense as well and suffered this or that extra damages.'

     "All such damages can be recovered: and it does not lie in the mouth of the fraudulent person to say that they could not reasonably have been foreseen. For instance, in this very case Mr. Doyle has not only lost the money which he paid for the business, which he would never have done if there had been no fraud: he put all that money in and lost it; but also he has been put to expense and loss in trying to run a business which has turned out to be a disaster for him. He is entitled to damages for all his loss, subject, of course to giving credit for any benefit that he has received. There is nothing to be taken off in mitigation: for there is nothing more that he could have done to reduce his loss. He did all that he could reasonably be expected to do."

In the same case Winn L.J., said, at p. 168:

     "It appears to me that in a case where there has been a breach of warranty of authority, and still more clearly where there has been a tortious wrong consisting of a fraudulent inducement, the proper starting point for any court called upon to consider what damages are recoverable by the defrauded person is to compare his position before the representation was made to him with his position after it, brought about by that representation, always bearing in mind that no element in the consequential position can be regarded as attributable loss and damage if it be too remote a consequence: it would be too remote not necessarily because it was not contemplated by the representor, but in any case where the person deceived has not himself behaved with reasonable prudence, reasonable common sense, or can in any true sense be said to have been the author of his own misfortune. The damage that he seeks to recover must have flowed directly from the fraud perpetrated upon him."