Smith New Court Securities v. Scrimgeour Vickers [1996] UKHL 3

Smith was induced by fraudulent misrepresentations to purchase Ferranti shares at an inflated price. The shares later collapsed in value due to an unrelated pre-existing fraud. The House of Lords held that in deceit, the plaintiff may recover all losses directly flowing from the fraudulent transaction, not limited to the transaction date valuation.

Facts

Citibank N.A., through its employee Mr Roberts, sold 28 million Ferranti shares to Smith New Court Securities Ltd for approximately £23 million in July 1989. Mr Roberts fraudulently represented that Smith was bidding against other parties, including a bid from Aeritalia at 81p per share. No such bids existed. Smith purchased the shares as a market-making risk at 82¼p per share, a price they would not have paid but for the misrepresentations.

Unknown to all parties at the time of sale, a massive fraud had been perpetrated on Ferranti by a third party, Mr Guerin. When this fraud was disclosed in September 1989, Ferranti shares collapsed in value. Smith sold the shares between November 1989 and April 1990, realising only £11.8 million, a loss of approximately £11.3 million.

Issues

Cross-appeal on Liability

Whether the trial judge’s findings that the second and third fraudulent misrepresentations were made should be upheld, and whether the first representation was also proved.

Appeal on Damages

What is the correct measure of damages in an action for deceit where a plaintiff has acquired property in reliance on fraudulent misrepresentation, particularly where subsequent losses were caused by an unrelated pre-existing fraud?

Judgment

On Liability

The House of Lords upheld the concurrent findings of the trial judge and Court of Appeal that the second and third representations were actionable fraudulent misrepresentations. Lord Steyn identified five principal reasons supporting these findings, including the corroborating evidence of Mr Marks and the undisputed evidence from the pricing meeting.

However, Lord Steyn departed from the Court of Appeal’s finding on the first representation, holding that the evidence did not establish it in sufficiently clear terms to justify a finding of deceit. This did not affect the outcome as the misrepresentations at the midday meeting induced Smith to enter the transaction.

On Damages

The House of Lords unanimously allowed the appeal on damages, restoring the trial judge’s award of approximately £10.76 million.

Lord Browne-Wilkinson set out seven key principles for assessing damages in fraudulent misrepresentation cases:

1. The defendant must make reparation for all damage directly flowing from the transaction;

2. Such damage need not have been foreseeable but must have been directly caused by the transaction;

3. The plaintiff may recover the full price paid but must give credit for benefits received;

4. As a general rule, benefits include market value at acquisition date, but this rule is not inflexible;

5. The general rule should not apply where the misrepresentation continued to operate after acquisition or where the plaintiff was locked into the property by the fraud;

6. The plaintiff may recover consequential losses caused by the transaction;

7. The plaintiff must mitigate once the fraud is discovered.

Lord Steyn emphasised that intentional wrongdoers should bear wider liability than merely careless defendants. He stated that the test of remoteness in deceit is not reasonable foreseeability but whether the loss was a direct consequence of the fraudulent transaction.

Implications

This case is a landmark authority on the measure of damages in deceit. It clarifies that:

The date of transaction rule for valuation is not inflexible and may be departed from where necessary to achieve full compensation.

A fraudster bears the risk of misfortunes directly caused by their fraud, even where the loss results from an unrelated latent defect unknown at the time of the transaction.

The policy distinction between deceit and negligence is justified: intentional wrongdoers should face more extensive liability as a deterrent to fraud and on moral grounds.

Where a plaintiff is effectively locked into a transaction by fraud, they may recover their actual realised loss rather than being limited to a notional value at the transaction date.

The decision reinforces the compensatory principle in tort while acknowledging that in fraud cases, all direct consequences flow to the fraudster regardless of foreseeability.

Verdict: Appeal allowed; cross-appeal dismissed. The trial judge's award of damages of £10,764,005 was restored. Smith was entitled to recover as damages the difference between the contract price paid and the amount actually realised on resale of the shares.

Source: Smith New Court Securities v. Scrimgeour Vickers [1996] UKHL 3