Side-tracking

    At the risk of being side-tracked I must now refer to two Court of Appeal decisions which were discussed in argument. In Royscot Trust Ltd. v. Rogerson [1991] 2 Q.B. 297 the Court of Appeal held that under section 2(1) of the Misrepresentation Act 1967 damages in respect of an honest but careless representation are to be calculated as if the representation had been made fraudulently. The question is whether the rather loose wording of the statute compels the court to treat a person who was morally innocent as if he was guilty of fraud when it comes to the measure of damages. There has been trenchant academic criticism of the Royscot case: see Richard Hooley, "Damages and the Misrepresentation Act 1967" (1991) 107 L.Q.R. 547-551. Since this point does not directly arise in the present case, I express no concluded view on the correctness of the decision in the Royscot case. The second case is the decision of the Court of Appeal in Downs v. Chappell [1996] 3 All E.R. 344. The context is the rule that in an action for deceit the plaintiff is entitled to recover all his loss directly flowing from the fraudulently induced transaction. In the case of a negligent misrepresentation the rule is narrower: the recoverable loss does not extend beyond the consequences flowing from the negligent misrepresentation: see Banque Bruxelles Lambert S.A. v. Eagle Star Insurance Co. Ltd. [1996] 3 W.L.R. 87. In Downs v. Chappell [1996] 3 All E.R. 344, 361, Hobhouse L.J. applied this narrower rule to an action for deceit. He enunciated the following "qualification" of the conventional rule [361h]:

 "In my judgment, having determined what the plaintiffs have lost as a result of entering into the transaction--their contract with Mr. Chappell--it is still appropriate to ask the question whether that loss can properly be treated as having been caused by the defendants' torts, notwithstanding that the torts caused the plaintiffs to enter into the transaction."

    That led Hobhouse L.J. "to compare the loss consequent upon entering into the transaction with what would have been the position had the represented, or supposed, state of affairs existed:" at p. 362a. The correctness of this proposition in a case of deceit was debated at the bar. Counsel for Citibank in whose interest it was to adopt this proposition felt some difficulty in doing so. In my view the orthodox and settled rule that the plaintiff is entitled to all losses directly flowing from the transaction caused by the deceit does not require a revision. In other words, it is not necessary in an action for deceit for the judge, after he had ascertained the loss directly flowing from the victim having entered into the transaction, to embark on a hypothetical reconstruction of what the parties would have agreed had the deceit not occurred. The rule in deceit is justified by the grounds already discussed. I would hold that on this point Downs v. Chappell was wrongly decided.

The date if transaction rule

    That brings me to the perceived difficulty caused by the date of transaction rule. The Court of Appeal referred to the rigidity of "the rule in Waddell v. Blockey (1879) 4 Q.B.D. 678, which requires the damages to be calculated as at the date of sale" [1994] 1 W.L.R. 1271, 1283G. No doubt this view was influenced by the shape of arguments before the Court of Appeal which treated the central issue as being in reality a valuation exercise. It is right that the normal method of calculating the loss caused by the deceit is the price paid less the real value of the subject-matter of the sale. To the extent that this method is adopted, the selection of a date of valuation is necessary. And generally the date of the transaction would be a practical and just date to adopt. But it is not always so. It is only prima facie the right date. It may be appropriate to select a later date. That follows from the fact that the valuation method is only a means of trying to give effect to the overriding compensatory rule: Potts v. Miller, 64 C.L.R. 282, 299, per Dixon J.; and County Personnel (Employment Agency) Ltd. v. Alan R. Pulver & Co. [1987] 1 W.L.R. 916, 925-926, per Bingham L.J. Moreover, and more importantly, the date of transaction rule is simply a second order rule applicable only where the valuation method is employed. If that method is inapposite, the court is entitled simply to assess the loss flowing directly from the transaction without any reference to the date of transaction or indeed any particular date. Such a course will be appropriate whenever the overriding compensatory rule requires it. An example of such a case is to be found in Cemp Properties (U.K.) Ltd. v. Dentsply Research & Development Corporation [1991] 2 E.G.L.R. 197, 201, per Bingham L.J. There is in truth only one legal measure of assessing damages in an action for deceit: the plaintiff is entitled to recover as damages a sum representing the financial loss flowing directly from his alteration of position under the inducement of the fraudulent representations of the defendants. The analogy of the assessment of damages in a contractual claim on the basis of cost of cure or difference in value springs to mind. In Ruxley Electronics and Construction Ltd. v. Forsyth [1996] A.C. 344, 360G, Lord Mustill said: "There are not two alternative measures of damages, as opposite poles, but only one; namely, the loss truly suffered by the promisee." In an action for deceit the price paid less the valuation at the transaction date is simply a method of measuring loss which will satisfactorily solve many cases. It is not a substitute for the single legal measure: it is an application of it.

Causation

    So far I have discussed in general terms the scope of a fraudster's liability in accordance with the rule identified with Doyle v. Olby (Ironmongers) Ltd. [1969] 2 Q.B. 158. It is now necessary to consider separately the three limiting principles which, even in a case of deceit, serve to keep wrongdoers' liability within practical and sensible limits. The three concepts are causation, remoteness and mitigation. In practice the inquiries under these headings overlap. But they are distinct legal concepts. For present purposes causation is the most important. The major issue in the present case is whether there is a causal link between the fraud and the loss arising by reason of the pre-existing fraud perpetrated on Ferranti. How should this matter be approached? The development of a single satisfactory theory of causation has taxed great academic minds.: see Hart and Honoré, Causation in the Law, 2nd ed. (1985) and Honoré, "Necessary and Sufficient Conditions in Tort Law," in Owen, Philosophical Foundations of Tort Law, (1995), p. 363. But, as yet, it seems to me that no satisfactory theory capable of solving the infinite variety of practical problems has been found. Our case law yields few secure footholds. But it is settled that at any rate in the law of obligations causation is to be categorised as an issue of fact. What has further been established is that the "but for" test, although it often yields the right answer, does not always do so. That has led judges to apply the pragmatic test whether the condition in question was a substantial factor in producing the result. On other occasions judges assert that the guiding criterion is whether in common sense terms there is a sufficient causal connection: see Yorkshire Dale Steamship Co. Ltd. v. Minister of War Transport [1942] A.C. 691, 706, per Lord Wright. There is no material difference between these two approaches. While acknowledging that this hardly amounts to an intellectually satisfying theory of causation, that is how I must approach the question of causation.

Remoteness and mitigation

    The second limiting principle is remoteness. I have already discussed the special rule of remoteness developed by the courts in the context of deceit. This requirement is in issue in the present case: if there is a sufficient causal link it must still be shown that the entire loss suffered by Smith is a direct consequence of the fraudulently induced transaction. The third limiting principle is the duty to mitigate. The plaintiff is not entitled to damages in respect of loss which he could reasonably have avoided. This limiting principle has no special features in the context of deceit. There is no issue under this heading and I need say no more about it.

Taking stock

    It is now necessary to take stock of the case. The distinctive features of the case are--

    (1) that the fraud of Mr. Roberts induced Smith to buy the Ferranti shares, the value of which were already at the date of sale doomed to collapse due to the fraud practised on the company by a third party; and

    (2) that by reason of the fraud of Mr. Roberts, Smith was induced to buy the shares as a market making risk, i.e. to hold on to the shares for sale at a later stage.

    In these circumstances Smith was truly locked into the transaction by reason of the fraud perpetrated on it. And the causative influence of the fraud is not significantly attenuated or diluted by other causative factors acting simultaneously with or subsequent to the fraud. The position would have been different if the loss suffered by Smith arose from a subsequent fraud. That would be a case like the misrepresented horse in Cockburn C.J.'s example in Twycross v. Grant, 2 C.P.D. 469, 544-545, where the buyer plainly cannot recover the entire value of the horse if it subsequently catches a disease and dies. In the actual circumstances of this case I am satisfied that there was a sufficient causal link between the fraud and Smith's loss. Moreover, for substantially the same reasons, I would hold that Smith's losses, calculated on the basis of the difference between the price paid and the proceeds of subsequent realisations, flow directly from the fraud. In my view Smith would on this basis be entitled to recover the sum of about £11.3m. Smith merely seeks restoration of the order for payment of £10,764,005 which Chadwick J. made on a different basis. In law Smith are entitled to succeed on this appeal to that extent.

Conclusion

    I have not lost sight of counsel for Citibank's argument that, given the way the case was pleaded, Smith should not be allowed to succeed on this legal basis. In my view the argument that Citibank was prejudiced is quite unreal. I reject it.

    I would allow Smith's appeal on damages and restore the order of Chadwick J.