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  Judgment - Smith New Court Securities v. Scrimgeour Vickers   continued  
 
 
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DAMAGES


The issue


 
62.         Given the fact that the subsequent dramatic fall in the value of Ferranti shares was caused by the disclosure of an earlier fraud practised on Ferranti by a third party the question is whether Smith is entitled to recover against Citibank the entire loss arising from the fraudulently induced transaction. Smith submits that the Court of Appeal adopted the wrong measure. Smith seeks to recover damages calculated on the basis of the price paid less the aggregate of subsequent realisations. Citibank contends that the loss attributable to the subsequent disclosure of the fraud by a third party is a misfortune risk and is irrecoverable. Citibank argues that the Court of Appeal adopted the correct measure.

Horses and shares


 
63.         The fraud perpetrated by Mr. Roberts on Smith related to shares quoted on the Stock Exchange. Undoubtedly, the legal measure of damages in an action in deceit when applied to transactions in shares may throw up special problems. It is not simply a matter of the perception of the market as to the value of the shares. If loss is to be determined by way of the price paid less a valuation of the shares at a given date, the determination of the real or true value of the shares, absent the deceit forming the basis of the claim, may give rise to difficult hypothetical problems. Even more difficult problems arise if it is alleged that for extrinsic reasons there has been a false market, e.g. because investors have been misled by widespread false statements about the value of the stock of the company. None of these practical considerations justify the adoption of a special rule in respect of share transactions. The same legal principle must govern sales of shares, goods, a business or land. It is therefore possible to simplify the problem. The example given by Cockburn C.J. in Twycross v. Grant (1877) 2 C.P.D. 469 is instructive. He said, at pp. 544-545:
     "If a man buys a horse, as a racehorse, on the false representation that it has won some great race, while in reality it is a horse of very inferior speed, and he pays ten or twenty times as much as the horse is worth, and after the buyer has got the animal home it dies of some latent disease inherent in its system at the time he bought it, he may claim the entire price he gave; the horse was by reason of the latent mischief worthless when he bought; but if it catches some disease and dies, the buyer cannot claim the entire value of the horse, which he is no longer in a condition to restore, but only the difference between the price he gave and the real value at the time he bought."
 
64.         Counsel for Citibank argued that Cockburn C.J. erred in saying that if the horse had some latent disease at the time of the transaction the buyer may claim the entire price he paid. He argued that in such a case there was no sufficient causal link between the latent disease and the eventual death of the horse. Counsel for Smith argued that the transaction, which was induced by deceit, directly led to the loss of the entire value of the horse. On any view it is clear that, if Cockburn C.J. is right, the law imposes liability in an action for deceit for some consequences that were unforeseen and unforeseeable when the tortfeasor committed the wrong. And if that is right it may tell us something about the correct disposal of the present case.

The justification for distinguishing between deceit and negligence


 
65.         That brings me to the question of policy whether there is a justification for differentiating between the extent of liability for civil wrongs depending on where in the sliding scale from strict liability to intentional wrongdoing the particular civil wrong fits in. It may be said that logical symmetry and a policy of not punishing intentional wrongdoers by civil remedies favour a uniform rule. On the other hand, it is a rational and defensible strategy to impose wider liability on an intentional wrongdoer. As Hart and Honoré, Causation in the Law , 2nd ed. (1985), p. 304 observed, an innocent plaintiff may, not without reason, call on a morally reprehensible defendant to pay the whole of the loss he caused. The exclusion of heads of loss in the law of negligence, which reflects considerations of legal policy, does not necessarily avail the intentional wrongdoer. Such a policy of imposing more stringent remedies on an intentional wrongdoer serves two purposes. First it serves a deterrent purpose in discouraging fraud. Counsel for Citibank argued that the sole purpose of the law of tort generally, and the tort of deceit in particular, should be to compensate the victims of civil wrongs. That is far too narrow a view. Professor Glanville Williams identified four possible purposes of an action for damages in tort: appeasement, justice, deterrence and compensation: (1951) 4 Current Legal Problems 137. He concluded, at p. 172:
     "Where possible the law seems to like to ride two or three horses at once; but occasionally a situation occurs where one must be selected. The tendency is then to choose the deterrent purpose for tort of intention, the compensatory purpose for other torts."
 
66.         And in the battle against fraud civil remedies can play a useful and beneficial role. Secondly, as between the fraudster and the innocent party, moral considerations militate in favour of requiring the fraudster to bear the risk of misfortunes directly caused by his fraud. I make no apology for referring to moral considerations. The law and morality are inextricably interwoven. To a large extent the law is simply formulated and declared morality. And, as Oliver Wendell Holmes, The Common Law (edited by M. De W. Howe), (1968), p. 106, observed, the very notion of deceit with its overtones of wickedness is drawn from the moral world.

The old cases


 
67.         For more than a hundred years at least English law has adopted a policy of imposing more extensive liability on intentional wrongdoers than on merely careless defendants. This policy was trenchantly spelt out by Lord Blackburn in Livingstone v. Rawyards Coal Co. (1880) 5 App.Cas. 25. He said, at p. 39:
     "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."
 
68.         Since Victorian times there have been great developments in our law of obligations. But there has been no retreat from the policy spelt out by Lord Blackburn. On the other hand, the way in which the law can distinguish between the intentional wrongdoer and a man who caused loss by a foolish but honest mistake was not worked out clearly in the old cases. Pasley v. Freeman, decided more than 200 years ago, marks the emergence of the tort of deceit: (1789) 3 Durn. & E. 51. In cases framed in deceit the measure of damages was held to involve ascertainment of the "real" or "face" value of the shares at the time of allotment or purchase. See Davidson v. Tullock (1860) 36 L.T. 97; Peek v. Derry (1887) 37 Ch.D. 541; reversed on liability (1889) 14 App.Cas. 337; Arkwright v. Newbold (1881) 17 Ch.D. 301, reversed on liability, 17 Ch.D. 313; Broome v. Speak [1903] 1 Ch. 586, (affirmed Shepheard v. Broome [1904] A.C. 342). Except for some useful general observations on valuation as a method of measuring loss, and the explanation of the enquiry into a past hypothetical event in the sense of the valuation of shares absent the fraud, I do not think those cases help much. And, except for the obiter dictum of Cockburn C.J. in Twycross v. Grant, C.P.D. 469, 544, the earlier cases do not touch on the problems in the present case. Finally, even in the last century it was realised that there must be sensible and practical limits to the heads of loss for which even an intentional wrongdoer can be held liable. Thus in Twycross v. Grant Cockburn C.J. said that if the fraudulently misdescribed horse subsequently catches a disease and dies the buyer cannot claim the entire value of the horse. But it took a long time before the precise nature of those limitations were clearly understood and explained.

Doyle v. Olby (Ironmongers) Ltd.[1969] 2 Q.B. 158

 
69.         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. 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. Lord Denning M.R. explained, at p. 167:
     "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."
 
70.     Winn and Sachs L.JJ. expressed themselves in similar terms.
 
71.         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 of his negative interest. The aim is to put the plaintiff into the position he would have been in if no false representation had been made. (3) The practical difference between the two measures was lucidly explained in a contemporary case note on Doyle v. Olby (Ironmongers) Ltd.: Treitel, " Damages for Deceit," (1969) 32 M.L.R. 556, 558-559. The author said:
     "If the plaintiff's bargain would have been a bad one, even on the assumption that the representation was true, he will do best under the tortious measure. If, on the assumption that the representation was true, his bargain would have been a good one, he will do best under the first contractual measure (under which he may recover something even if the actual value of what he has recovered is greater than the price)."

    (4) Concentrating on the tort measure, the remoteness test whether the loss was reasonably foreseeable had been authoritatively laid down in The Wagon Mound in respect of the tort of negligence a few years before Doyle v. Olby (Ironmongers) Ltd. was decided: Overseas Tankship (U.K.) Ltd. v. Morts Dock & Engineering Co. Ltd. (The Wagon Mound) [1961] A.C. 388. Doyle v. Olby (Ironmongers) Ltd. settled that a wider test applies in an action for deceit. (5) The dicta in all three judgments, as well as the actual calculation of damages in Doyle v. Olby (Ironmongers) Ltd., make clear that the victim of the fraud is entitled to compensation for all the actual loss directly flowing from the transaction induced by the wrongdoer. That includes heads of consequential loss. (6) Significantly in the present context the rule in the previous paragraph is not tied to any process of valuation at the date of the transaction. It is squarely based on the overriding compensatory principle, widened in view of the fraud to cover all direct consequences. The legal measure is to compare the position of the plaintiff as it was before the fraudulent statement was made to him with his position as it became as a result of his reliance on the fraudulent statement.

     Doyle v. Olby (Ironmongers) Ltd. was subsequently applied by the Court of Appeal in two Court of Appeal decisions: East v. Maurer [1991] 1 W.L.R. 461 and Smith Kline & French Laboratories Ltd. v. Long [1989] 1 W.L.R. 1. East v. Maurer is of some significance since it throws light on a point which arose in argument. Counsel for Citibank argued that in the case of a fraudulently induced sale of a business, loss of profits is only recoverable on the basis of the contractual measure and never on the basis of the tort measure applicable to fraud. This is an oversimplification. The plaintiff is not entitled to demand that the defendant must pay to him the profits of the business as represented. On the other hand, East v. Maurer shows that an award based on the hypothetical profitable business in which the plaintiff would have engaged but for deceit is permissible: it is classic consequential loss. Turning to the Smith Kline case it has been suggested that the Doyle v. Olby (Ironmongers) Ltd. rule was wrongly applied: Burrows, Remedies for Torts and Breach of Contract , 2nd ed. (1994), pp. 173-174. The correctness of that comment I need not examine. In my view it is sufficient to say that the principles emerging from Doyle v. Olby (Ironmongers) Ltd. are good law.