East v Maurer [1990] EWCA Civ 6 (28 September 1990)

The plaintiffs purchased a hairdressing salon after the defendant falsely represented he would not work at his nearby competing salon. When business declined due to the defendant's continued local practice, the plaintiffs claimed damages for fraudulent misrepresentation. The Court of Appeal confirmed that loss of profits is recoverable in deceit actions.

Facts

The first defendant owned two ladies’ hairdressing salons in Bournemouth, one at Exeter Road and another at Canford Cliffs. In 1979, he decided to sell the Exeter Road business. During negotiations with the plaintiffs, Mr and Mrs East, he deliberately and falsely represented that he had no intention of working at the Canford Cliffs salon and intended to open a salon abroad, probably in Switzerland. Relying on these representations, the plaintiffs purchased the Exeter Road business for £20,000.

Mrs East took over the salon on 1 September 1979. Shortly thereafter, business declined alarmingly as the first defendant was in fact working full-time at his Canford Cliffs salon, attracting his former clientele. Despite spending money on advertising, installing a solarium, and combining hairdressing with a boutique, Mrs East was unable to make the business profitable. After over three years, she sold the lease for only £7,500.

Issues

The principal issue on appeal was whether loss of profits was recoverable as damages in an action for deceit, and if so, whether the judge had correctly assessed the quantum of such damages.

Judgment

The Court of Appeal, in a judgment delivered by Lord Justice Beldam, confirmed that loss of profits is recoverable in an action for deceit. The court distinguished damages in fraud from damages in contract, noting that in fraud the defendant must make reparation for all actual damages directly flowing from the fraudulent inducement.

“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 fraud, they are not so limited. The defendant is bound to make reparation for all the actual damages directly flowing from the fraudulent inducement.”

Lord Justice Beldam cited Lord Atkin’s statement from Clark v Urquhart:

“I should have thought it would be based on the actual damage directly flowing from the fraudulent inducement.”

However, the court held that the trial judge had erred in his approach to quantifying the loss of profits. The judge had based his award on what profits the business might have made had the defendant’s statement been a warranty, rather than considering what profits the plaintiff might have expected from another similar business purchased for the same sum. The court reduced the loss of profits award from £15,000 to £10,000, taking into account that Mrs East was moving to a new area, dealing with different clientele, and facing competition from other salons.

Lord Justice Mustill’s Analysis

Lord Justice Mustill agreed, emphasising that the correct approach is to compare the plaintiff’s position as it would have been without the fraudulent act with the plaintiff’s actual position. The loss of profits awarded related to the hypothetical profitable business in which the plaintiffs would have engaged but for buying the Exeter Road business.

Implications

This case is significant authority for the principle that loss of profits can be recovered in actions for fraudulent misrepresentation, provided they flow directly from the fraud. The measure of damages in deceit differs from contract: the plaintiff is to be compensated for all losses suffered, not put in the position as if the representation were true. The case also demonstrates the importance of proper assessment methodology when quantifying such damages, requiring consideration of what the plaintiff would have achieved in an alternative transaction rather than what the actual business might have earned under different circumstances.

Verdict: Appeal allowed in part. The award for loss of profits was reduced from £15,000 to £10,000. The appellant was awarded half the costs of the appeal.

Source: East v Maurer [1990] EWCA Civ 6 (28 September 1990)