Fraudulent Misrepresentation and Recovery of Damage - Corporate and Investment Fraud

By: Leigh Ellis
The law takes a different approach to determining the measure of damages cases of fraud. Indeed the application of the principles results in damages for deceit being higher than those for negligence, which is also a tort. The differences between the assessment of damages in contract and the tort of deceit are:

1. In contract, the damage is assessed by what the parties would have seen as the damage being caused by a breach at the time the contract was formed: the date of the contract. In actions for the tort of deceit, damage is assessed by reference to the date the tort was committed;

2. The correct measures of damages in tort is the sum that would place the claimant in the position they would have been in if the fraudulent representation had not taken place; this contrasts with the position in contract, where the award is the sum that would place the claimant in the position they would have been in of the warranty or condition were true; and

3. In tortious claims, compound interest may be awarded as opposed to the standard of simple interest.
The end result is that claimant is entitled to recover their whole entire loss of sums that they are out of pocket, rather than simply what they expected to gain under a contract.

Entering into the contract knowing that the representation is fraudulent does not preclude recovery. Often, a businesses contract with the defendant will be entered into in reliance of statements by third parties of a who have a relationship with the defendant. They are also potentially liable for deceit.

No Resultant Contract

Where no contract has resulted from the deceitful conduct, the measure of damages is the damage that the innocent party can show resulted from the fraudulent inducement. Thus expenses incurred in reliance of the inducement may be recovered, such as valuation fees and legal fees, along with lost profits. In one case, the claimant, who was a printer, was falsely informed by the defendant that they were entitled to reproduce articles protected by intellectual property rights. The printer was entitled to recover for losses that he expected to make from the contract as well as their expenses preparing for the performance of the contract.
Where the deception leads to permanent loss of goods, the claimant is entitled to recover the market value of the goods lost.

Sales of Assets and Services under Contract

Where the contract is for something other than shares, the measure of damages remains the same: the value transferred, less the value received.
Consequential loss is also recoverable, provided that it is not too remote. This touchstone for consequential loss is whether the loss would have taken place in the ordinary course of events. Instances of losses recovered include refit expenses where a ship was purchased for international trade; and where a business is purchased in reliance of a deceit, the expenses incurred and capital losses were recoverable.

Investment Fraud

To take an illustration of how damages for fraudulent misrepresentation are calculated, in a sale of shares, the proper sum for damages in contract is the sum paid less the market value of the shares. Where the transaction is tainted by fraud, the purchase price is reduced by the actual value of the shares (if any) at the time of purchase. The date at which these sums are calculated is at the date of the allotment of the shares. The actual value of the shares is the value of the shares if the defendant knew the truth of the factitious circumstances that deceptively gave value to the shares. The actual value of the shares may well be nil.
The reason courts use the actual value rather than the market value of the shares is because the market value is not necessarily the relevant marker to which the actual value of the shares may be attached, because of the factitious and delusive circumstances of the valuation. The market value is evidence of value and not proof of it.
The tortious approach to calculating damages essentially indemnifies the innocent party from losses on the transaction.

Conclusions

Such are the ways and means that damage may arise from fraudulent conduct, the assessment of damages and loss to a party are entirely reliant on the circumstances of the case. Accordingly, no two cases are different and require an independent calculation of the damage suffered by the particular defendant.

Gillhams Solicitors is a business law firm in the City of London. Our lawyers provide legal advice on international commercial litigation and international intellectual property business disputes.