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

The seller of a hair salon fraudulently stated he would not work in a nearby rival salon. The buyers suffered losses after he did so. The Court held that damages for deceit could include the profits the buyers might have made had they bought a different, non-fraudulent business instead.

Facts

The plaintiffs, Mr and Mrs East, purchased one of two hairdressing salons owned by the defendant, Mr Maurer, for £20,000. During negotiations, the defendant fraudulently represented that he had no intention of working in his other salon in the same town and that he intended to move abroad. The plaintiffs relied on this statement, believing they would retain the defendant’s clientele. In reality, the defendant continued to work at his other nearby salon, and many of his former clients followed him there. As a result, the plaintiffs’ business struggled significantly, never achieving the level of profitability they had anticipated. They were eventually forced to sell the salon at a loss. The plaintiffs brought an action for damages for deceit (fraudulent misrepresentation).

Issues

The central legal issue was the correct measure of damages for the tort of deceit. The court had to determine whether the plaintiffs were entitled to damages calculated on a contractual basis (i.e., the profits they would have made had the representation been true) or on a tortious basis (i.e., to be put in the position they would have been in had the representation not been made). A key sub-issue was whether the tortious measure could encompass damages for the loss of a profitable opportunity that the plaintiffs were diverted from by the defendant’s fraud.

Judgment

The Court of Appeal allowed the appeal in part, finding that the trial judge had erred in calculating damages on a contractual basis. The court affirmed the established principle that the measure of damages in deceit is the tortious measure, which aims to restore the claimant to the position they were in before the tort was committed.

The Correct Measure of Damages

The court, led by Mustill L.J., held that the plaintiffs were not entitled to claim the profits they would have made from the purchased business if the defendant’s representation had been true. This would be a contractual measure of damages, appropriate for a breach of warranty. However, the court ruled that the tortious measure was wide enough to include compensation for the opportunity the plaintiffs lost to acquire a different, profitable business. The defendant’s deceit induced the plaintiffs to buy this specific, problematic salon, thereby preventing them from using their capital to buy a different, hypothetical but honest business that would have generated a reasonable profit.

This seems to me to be a case where the plaintiffs are not claiming the profits which they would have made from Mrs. Maurer’s business if the representations had been true… but the profits which they would have made if they had bought a different hairdressing business in the area – a business which, it is to be assumed… would have been available for purchase for a similar sum of money, but would have yielded a respectable, if not spectacular, profit. Such a claim seems to be well within the measure of damages for deceit, as explained by the House of Lords in Doyle v. Olby (Ironmongers) Ltd.

Re-assessment of Damages

The trial judge had awarded a global sum of £15,000 for loss of profits, which the Court of Appeal identified as being erroneously calculated on a contractual basis. The Court of Appeal set this figure aside and substituted it with an award of £10,000. This sum was calculated to represent the profits the plaintiffs might reasonably have expected to make from a hypothetical alternative hairdressing business they could have bought, had they not been deceived into buying the defendant’s. This sum was in addition to other awarded damages for expenses and capital loss on the sale of the business.

Implications

The decision in East v Maurer is a key authority on the assessment of damages for fraudulent misrepresentation. It clarifies and develops the principle from Doyle v Olby (Ironmongers) Ltd, establishing that while a claimant cannot recover for loss of the bargain (contractual damages), they can recover for the loss of a profitable opportunity they were diverted from by the deceit. This ‘lost opportunity’ cost is a legitimate head of damage within the tortious framework. The case provides a more comprehensive and just remedy for victims of fraud, acknowledging the wider economic harm caused by being locked into a fraudulent transaction. It ensures that the tortfeasor is liable for all losses directly flowing from their fraudulent inducement, including the loss of profit from an alternative investment the claimant would have otherwise made.

Verdict: The appeal was allowed. The original award of £15,000 for loss of profits was set aside and substituted with a figure of £10,000 to represent damages for the lost opportunity to purchase and profit from an alternative business.

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