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

Smith New Court bought shares based on a fraudulent misrepresentation. After purchase, an unrelated, massive fraud was revealed, collapsing the share price. The House of Lords held the defendant liable for all direct losses, even unforeseeable ones, flowing from the transaction.

Facts

Smith New Court Securities Ltd (SNC) was induced to purchase a large block of shares in Ferranti International Signal plc for approximately £23.1 million. The purchase was made based on fraudulent misrepresentations from the defendant, Scrimgeour Vickers (SV), who, acting for an undisclosed principal, falsely claimed there were two other bidders for the shares. This induced SNC to overpay. Shortly after the acquisition, a separate and colossal fraud within Ferranti, which was unknown to both parties at the time of the sale, was publicly revealed. This caused Ferranti’s share price to plummet. SNC eventually sold the shares for a mere £11.8 million, incurring a total loss of over £11 million. SNC brought an action for damages for the tort of deceit.

Issues

The central legal issue before the House of Lords was the correct measure of damages for fraudulent misrepresentation. The key questions were:

1. The Proper Measure of Damages

Should damages be assessed based on the difference between the price paid and the actual market value at the date of purchase (the ‘transaction date rule’), or should they cover all direct losses flowing from the fraudulent transaction?

2. Foreseeability and Causation

Is a defendant in a deceit action liable for losses that were not reasonably foreseeable? Specifically, was SV liable for the catastrophic fall in the shares’ value caused by the revelation of the unrelated Ferranti fraud, a risk SNC would not have been exposed to but for the deceit?

Judgment

The House of Lords unanimously allowed SNC’s appeal, restoring the trial judge’s full award of damages. Lord Browne-Wilkinson, delivering the leading judgment, clarified and affirmed the principles for assessing damages in cases of deceit, principally stemming from Doyle v. Olby (Ironmongers) Ltd. [1969] 2 Q.B. 158.

He established that the purpose of damages for deceit is to restore the victim to the position they would have been in had the representation not been made. This is distinct from the contractual measure, which aims to put the claimant in the position they would have been in had the representation been true.

Lord Browne-Wilkinson laid down several key principles:

1. The defendant is liable for all the damage directly flowing from the induced transaction.
2. The test for remoteness in deceit is not reasonable foreseeability; liability extends to all direct consequences.
3. The victim is entitled to recover the full price paid, less any benefit received (such as the proceeds from selling the asset).
4. While damages are generally assessed at the date of the transaction, this is not a rigid rule. The court can assess damages at a later date to ensure full compensation for losses suffered as a result of being ‘locked into’ the transaction by the fraud.
5. The plaintiff must take reasonable steps to mitigate their loss once the fraud is discovered, but the burden is on the defendant to prove a failure to mitigate.

Critically, the court held that the defendant’s fraud caused SNC to acquire an asset they would not otherwise have bought. Therefore, all losses stemming from holding that asset were a direct consequence of the fraud. Lord Browne-Wilkinson stated:

The defendant is bound to make reparation for all the damage directly flowing from the transaction… Nor does the loss cease to be recoverable because the claimant has been locked into the transaction by the fraud and the property acquired has continued to fall in value even after the fraud has been discovered… If the fraud had not been committed, the plaintiff would not have been on the rollercoaster and would not have suffered the loss. The fraudster must pay for all such loss.

The court reasoned that because the fraud induced SNC to enter the transaction, the defendant was responsible for all losses sustained by being locked into holding the shares, including the loss from the market collapse caused by the revelation of the second, unrelated fraud. This loss was a direct, albeit unforeseeable, result of the initial deceit.

Implications

This landmark decision solidifies the special, punitive-like nature of the damages awarded for the tort of deceit. It confirms that the measure of damages for fraud is far wider than for negligence or breach of contract. By holding the fraudster liable for all direct consequences, regardless of foreseeability, the law places the entire risk of the transaction onto the person who committed the fraud. The case is a cornerstone of English tort law, providing significant protection to victims of fraudulent misrepresentation and serving as a powerful deterrent against commercial dishonesty. It clarifies that a victim is not left to bear losses from market volatility or latent defects in an asset they were fraudulently induced to acquire.

Verdict: The appeal was allowed. The order of the trial judge, awarding the plaintiff the full extent of their losses (£11.3 million plus interest), was restored.

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