LORD KEITH OF KINKEL

My Lords,

    For the reasons given in the speeches to be delivered by my noble and learned friends, Lord Browne-Wilkinson and Lord Steyn, which I have read in draft and with which I agree, I would allow the appeal, dismiss the cross-appeal and restore the order of the trial judge as to damages.

LORD MUSTILL

My Lords,

    The speech to be delivered by my noble and learned friend, Lord Steyn deals with both liability and damages. On the issue of liability I gratefully adopt the analysis of law and fact, and agree that in respect of the second and third occasions it has, but in respect of the first it has not, been established that an actionable misrepresentation was made by Citibank N.A. (acting through Mr. Roberts) to Smith New Court Securities Ltd. I also agree that the conclusion regarding the first occasion, which differs from that of the Court of Appeal, does not affect the liability of Citibank for having induced Smith to enter into the purchase of Ferranti shares.

    On the question of damages I further agree that they should be assessed on the basis of the difference between the contract price and the amount actually realised by Smith on the resale, and would therefore allow the appeal and restore the award of the trial judge on damages. On this aspect of the dispute I wish, however, to add a very few words. Notwithstanding the high authority of its source I cannot regard the judgment of Lord Denning M.R. in Doyle v. Olby (Ironmongers) Ltd. [1969] 2 Q.B. 158 as an invariable guide to the assessment of damages for fraudulent misrepresentation. The appeal in that case was not fully argued by counsel. The judgments were not reserved and do not sit very easily together. To my mind the propositions which on the argument of the present appeal were sought to be extracted from the decision were painted with too broad a brush to deal accurately with all the problems which may arise. True, the assessment of damages often involves so many unquantifiable contingencies and unverifiable assumptions that in many cases realism demands a rough and ready approach to the facts. True also that in a case of fraud there are good reasons for departing in some respect from the ordinary rules: and the irrelevance of foreseeability provides an example. Nevertheless, there are instances where more is required in the way of analysis than can be found in Doyle v. Olby (Ironmongers) Ltd., and this is one. For my part, I would suggest that in the future when faced with situations such as the present courts would do well to be guided by the seven propositions set out by my noble and learned friend, Lord Browne-Wilkinson in the latter part of his speech. The fourth and fifth of these are, I believe, amply sufficient to show that the damages awarded by the judge ought to be upheld.

LORD SLYNN OF HADLEY

My Lords,

    I have had the advantage of reading the text of the speech prepared by my noble and learned friends, Lord Browne-Wilkinson and Lord Steyn. I agree that for the reasons they give the appeal of Smith New Court Securities Ltd. should be allowed and that the order of Chadwick J. as to damages be restored and that the cross-appeal on liability should be dismissed.

LORD STEYN

My Lords,

    There is an appeal and cross-appeal against the judgment of the Court of Appeal dated 17 February 1994 to be considered. The Court of Appeal upheld a judgment dated 25 March 1992 by Chadwick J. so far as he concluded that the plaintiffs in an action in the Chancery Division had established actionable fraudulent misrepresentations in respect of the sale of a parcel of shares. Despite the fact that Chadwick J. had come to his conclusions in a witness action the Court of Appeal held that he had misdirected himself on one aspect of the issues of fact on liability. Accordingly the Court of Appeal felt free to consider the case afresh without being rigidly bound by all the judge's findings of fact. In the result the Court of Appeal affirmed the judgment on liability of Chadwick J. on additional grounds. The correctness of the Court of Appeal's decision on liability is the subject matter of the cross-appeal. The arguments on the cross-appeal were addressed to issues of pure fact. Moreover, in material respects the arguments of counsel for the cross-appellant challenged concurrent findings of fact of the trial judge and the Court of Appeal.

    By contrast the appeal challenges the decision of the Court of Appeal on a question of principle, namely the correct measure of damages in an action for deceit. The judge adopted a valuation method to assess damages and held that the buyers were entitled to damages in a sum of the order of £10.7m. In arriving at this conclusion the judge took into account a subsequent fall in the value of the shares, which was caused by a pre-existing and unconnected fraud which had been perpetrated on the company concerned. The Court of Appeal ruled that as a matter of law the judge applied the wrong measure of damages, and that the correct measure was the difference between the price paid by the buyer and the price which, absent the misrepresentations, the shares would have fetched on the open market on the acquisition date. It was common ground that on that date the fraud perpetrated by the third party was not known to the market. On this basis the Court of Appeal reduced the damages to which the buyers were entitled to a sum of the order of £1.1m.

    My Lords, a detailed review of the testimonial battleground at trial has left me in no doubt that the cross-appeal ought to be dismissed. I will have to explain my reasons for this firm conclusion in some detail. The helpful judgments of Chadwick J. and the Court of Appeal are now respectively reported: [1992] B.C.L.C. 1104 and [1994] 1 W.L.R. 1271. It is therefore possible to deal with the cross-appeal on liability somewhat more economically than would otherwise have been the case. I will then turn to the important question of law as to the correct legal measure of damages. I will explain why I think that the appeal should be allowed and that the award of damages made by Chadwick J. should be restored.

The story of the Ferranti shares

    In July 1988 Citibank N.A., a company carrying on business as a bank in London, made available a loan facility of £23m. to Parent Industries Inc., a United States company. As security for the loan Parent charged 28m. shares in Ferranti International Signal Inc. to Citibank. A Mr. Guerin, a former director of Ferranti, was the beneficial owner of Parent. Mr. Peck was Mr. Guerin's man at Parent and occupied the position of President. By mid-July 1989 Parent was in default under the loan agreement. Citibank was urgently considering the realisation of the security for its loan. In the phrase often used at the trial it was a "forced sale" situation.

    On 21 July 1989 Citibank, acting through the brokers Scrimgeour Vickers (Asset Management) Ltd., sold the 28m. Ferranti shares to Smith New Court Securities Ltd. ("Smith") for about £23m., the price per share being 82¼ p. Mr. Roberts, a senior employee of Citibank and director of Scrimgeour, arranged the sale. In doing so he dealt with Mr. Lewis and Mr. Abrahams, two directors of Smith and market makers by occupation.

    At the trial the case of Smith was that Mr. Roberts induced Smith by fraudulent misrepresentations to buy the Ferranti shares. In order to understand the nature of Smith's case it is necessary to explain the vicissitudes of the value of shares in Ferranti. On 14 July 1989 Ferranti made a preliminary announcement of its financial results for the year ended 31 March 1989. On the basis of that information the market value of the parcel of Ferranti shares was probably of the order of 78p to 82p per share, i.e. a few pence lower than the prices quoted on the Stock Exchange. Ferranti, Citibank and Smith, as well as the individuals acting for these companies, and the market generally, did not know that a massive fraud had been perpetrated on Ferranti. In real terms the market price of the Ferranti shares on 21 July 1989 was a fictitious price. There was a false market in Ferranti shares. The fact of the fraud and its impact on the value of Ferranti shares only became known in September 1989. By a letter of 29 September 1989 together with unaudited group accounts the Chairman of the Board of Ferranti explained to shareholders that the fraud had caused a reduction in the net worth of the Ferranti Group as at 31 March 1989 of approximately £170m. (from £370.8m. to £198.5m.) and a reduction in profit for the year of approximately £18m. (from £29.3m. to £10.9m.). In November 1989 Ferranti published the revised audited accounts for the year ended 31 March 1989. Those accounts confirmed the pessimistic predictions made in late September. In these changed circumstances, and between 20 November 1989 and 30 April 1990, Smith disposed of the Ferranti shares by selling them in the market in relatively small parcels at prices ranging from 49p per share to 30p per share. The difference between the total price paid by Smith and the total of the prices received was £11.3m.

    That brings me to the events of 21 July 1989 so far as they are relevant to the alleged fraudulent misrepresentations. In order to render the shape of the case intelligible it will be necessary to give a chronological account of the sequence of events, with the rival contentions of the parties as to the principal disputes interspersed. Shortly before 9.30 a.m. on 21 July 1989 Mr. Roberts asked Mr. Lewis whether Smith would be interested in buying the Ferranti shares. At 9.43 a.m. Mr. Lewis phoned Mr. Roberts. Mr. Abrahams was also a party to the conversation. The discussion lasted 13 minutes. Mr. Lewis confirmed that Smith was interested in purchasing the Ferranti shares. Smith's case was that during the conversation Mr. Roberts said that Smith would be in competition with two other bidders interested in buying the Ferranti shares, namely a company in the Citicorp Group and another bidder not in the securities industry. Mr. Roberts identified the first company as Citicorp Scrimgeour Vickers Ltd. ("C.S.V."), a company carrying on business as stockbrokers and market makers in London. This was the first alleged representation. At trial Mr. Roberts said that he went no further than to say that there were at least two other parties interested. There was in fact no bidder for the Ferranti shares from outside the securities industry. The dispute as to what was said in the 9.43 a.m. conversation was a major issue at the trial. What was not in issue was that Mr. Lewis and Mr. Abrahams came to believe that Smith would be in competition for the Ferranti shares with a bidder from outside the securities industry.

    Following the 9.43 a.m. conversation, Mr. Abrahams and Mr. Lewis attended a meeting with other employees of Smith to discuss whether Smith should bid for the Ferranti shares and, if so, at what price. Mr. Lewis and Mr. Abrahams told those present at the meeting that Smith would be bidding in competition against C.S.V. and one other bidder from outside the securities industry. The decision taken at the meeting was that Smith should bid 82p per share. The reasoning that led to this decision is of some relevance. The facts are common ground. Smith had a choice. It could have bought the shares as a "bought deal" or as a market making risk. The first would have involved Smith buying the Ferranti shares and selling them through Smith's agency arm, at a profit, within a matter of hours to institutional clients. In a transaction of the magnitude of buying 28m. shares in Ferranti it would have been normal for Smith to do a bought deal. Instead Smith chose to do a transaction of the second type. This involved buying the shares with a view to holding them as a market making risk and only selling them as and when the opportunity or opportunities to do so might arise. Smith took the view that the Ferranti shares could not be sold to institutional clients at a price above 80p per share without a recommendation to clients, which Smith's agency arm was not prepared to give. In order to do a bought deal Smith would have had to buy the Ferranti shares at below 80p. If Smith had not believed that it was in competition with a bidder from outside the securities industry, it would have bid for the shares at a price consistent with doing a bought deal at a profit. That price would have been 78p per share. It was agreed that if Smith had bid 78p per share, the bid would not have been accepted by Citibank.

    In the presence of Mr. Abrahams, Mr. Lewis telephoned Mr. Roberts at 10.42 a.m. This call lasted about two minutes. It was made some 20 minutes after the conclusion of the pricing meeting. At the trial Mr. Lewis and Mr. Abrahams testified that Mr. Lewis told Mr. Roberts that Smith had decided to bid for the Ferranti shares; that Mr. Lewis asked him to attend at Smith's offices so that Smith could make the bid in person; and that Mr. Lewis asked Mr. Roberts to bring with him the other two bids in sealed envelopes to Smith's offices. Mr. Roberts agreed that Mr. Lewis asked him to come to Smith's offices to hear the bid. But Mr. Roberts denied that anything else was said about bringing the other bids in sealed envelopes.

    Mr. Roberts arrived at the offices of Smith shortly after noon. A meeting then took place between Mr. Roberts and three employees of Smith, namely Mr. Lewis, Mr. Abrahams and Mr. Marks. Mr. Marks had been present at the pricing meeting. It is common ground that Mr. Lewis said that Smith would bid 82p per share. Mr. Roberts did not have authority to accept the bid but he said that he would recommend the bid. What is in dispute is the rest of the conversation. Mr. Lewis said that Mr. Roberts said at the start of the meeting that he would disclose the competing bids after Smith had made its bid. This was called the second representation. Mr. Lewis, Mr. Abrahams and Mr. Marks said that after Mr. Lewis made the bid at 82p Mr. Roberts said that Aeritalia (an Italian company) had bid 81p for the shares and C.S.V. had bid 75-77p. This was called the third representation. Mr. Roberts said that he made no mention of bids: he said that he said that Aeritalia and C.S.V. had given indications in the 81p and 75-77p regions. Neither Aeritalia nor C.S.V. had made any bid. It was conceded that if the second and third representations had been made, they would have been fraudulently made.

    Mr. Roberts returned to his office and told the decision-makers at Citibank about the bid. While the bid had formally lapsed because it was not immediately accepted Smith remained a willing buyer of the Ferranti shares at 82p per share throughout the afternoon. Shortly after 5.00 p.m. on the same day the bargain was struck. It was done in a telephone conversation between Mr. Lewis and Mr. Abrahams, on the Smith side, and Mr. Fisher, a director and senior dealer at Scrimgeour. The main reason for the additional ¼p was to establish that the contract was made after trading hours on Friday 21 July, so that it would not have to be reported under Stock Exchange rules until the following business day.

    The rest of the story can be taken quite briefly. After the suspension of Ferranti shares in September 1989, Smith started to investigate the circumstances in which it had purchased the Ferranti shares. Smith discovered that Aeritalia had never bid for the Ferranti shares. That discovery led to the institution of the proceedings in January 1990.