2. Damages for misrepresentation

Damages are available for misrepresentation. In most cases, the damages are awarded on a tortious basis (putting the claimant into the position it would have been had it not entered into the contract). This means that, in an action for misrepresentation inducing the buyer to enter into an acquisition agreement, the claimant is entitled to the difference between the price paid for the shares or assets and their actual value at the date of the acquisition. The damages may cover losses arising from the contract, provided they are not too remote (and losses of opportunity and not of bargain) and even the expenses of entering into the contract.

Misrepresentation can also give rise to a claim for breach of contract if, for example, the misrepresentation has been incorporated into the contract in the form of a warranty. Where a claim is successfully brought for breach of contract, damages are assessed on the contractual basis of putting the claimant into the position it would have been if the representation had been true. He would therefore receive the difference between the actual value of the subject matter of the contract and the value that he would have had if the representation had been true. Here, the claimant can obtain damages for loss of bargain.

The type of misrepresentation determines the availability of damages and the basis on which they are awarded.

Fraudulent misrepresentation

For fraudulent misrepresentation, the claimant has the right to rescind the contract, or claim damages in the tort of deceit (not under the Misrepresentation Act 1967) or both. The damages seek to put the claimant into the position he was in before the misrepresentation was made.

Normally in the tort of negligence, damages are restricted to losses which are reasonably foreseeable (The Wagon Mound [1961] AC 388). However, the test of foreseeability does not apply in the context of the tort of deceit; all that is required is that the damages "flowed" from the fraud (Doyle v Olby (Ironmongers) Limited [1969] 2 QB 158). Damages may be awarded for all losses directly flowing from the misrepresentation, even if those losses are unforeseen. This is a potentially significant distinction between the fraudulent measure of damages and the usual, less generous, tortious test of remoteness (Clark v Urquhart [1930] AC 28).

Liability for unforeseen losses in the tort of deceit means that the defendant may bear the risk of the claimant's losses being increased by events subsequent to the fraud (such as decline in the market value of the subject matter of the contract) and the consequential losses directly flowing from the fraudulent misrepresentation (such as wasted expenses). In the leading authority on this point, a fraudulent misrepresentation made to competing bidders in a share sale led to an inflated share price. The claimant purchased the shares and held onto them for a period of time when the price fell as a result of an unconnected fraud. The House of Lords decided that the measure of damages was wide enough to cover the difference between the price the claimant paid and the amount recovered on the resale of the shares plus all consequential loss caused by having entered into the transaction. The normal test of foreseeability did not apply in this case (Smith New Court Securities Limited v Scrimgeour Vickers (Asset Management) Limited and Others [1996] 4 All ER 769).

The more generous approach to damages in fraud cases means that lost profits may be recoverable (Parabola Investments Ltd & Anor v Browallia CAL Ltd & Ors [2009] EWHC 901 (Comm)).

It is not yet clear if exemplary (that is, punitive) damages can be awarded for fraud. They will certainly not be awarded where the defendant has already been convicted and imprisoned for the fraud as this would infringe the basic principle that a man should not be punished twice for the same offence.

The claimant must give credit for any benefits which he has received as a result of the transaction (OMV Petrom SA v Glencore International AG [2015] EWHC 666 (Comm)).

Contributory negligence cannot be used as a defence in cases of fraudulent misrepresentation (Standard Chartered Bank v Pakistan National Shipping Corporation [2002] UKHL 43).

However, mitigation of loss is relevant. Once a fraud is discovered, the claimant must take all reasonable steps to mitigate his loss (Smith New Court).

Negligent misrepresentation

Where the maker of the misrepresentation is unable to show that it had reasonable grounds for believing, and did believe, that the statement was true, the claimant is entitled to rescind the contract (subject to the court's discretion) and claim damages under section 2(1) Misrepresentation Act 1967. However, the court has a discretion to refuse to allow rescission, except in cases of fraud, and award damages instead, under section 2(2) of the Act. However, an award of damages in lieu of rescission under that section could only be made if rescission was available.

Although fraud need not be established, damages for negligent misrepresentation are assessed as if for fraud (the so-called "fiction of fraud" is used (Royscot Trust v Rogerson [1991] 2 QB 297)). Such damages are awarded on a tortious basis (putting the claimant into the position it would have been had it not entered the agreement), and the rule of remoteness used in this context is all direct, not all foreseeable, losses. That is, a defendant will be liable for all consequential losses whether foreseeable or not. The traditional view is that a defendant cannot seek to reduce the damages payable by adducing evidence of, or speculating about, other transactions the claimant might have entered into had he not entered into the transaction in question (see Downs v Chappell [1997] 1 WLR 426, 441). However, in Yam Seng PTE Ltd v International Trade Corporation Ltd [2013] EWHC 111 (QB) it was held that an alternative agreement may be relevant to the assessment of damages under section 2(1) of the Act, but for damages to be reduced on this account, the defendant has to demonstrate with a reasonable degree of certainty both the fact that the claimant would probably have suffered a loss from entering into an alternative transaction and the amount of that loss.

Damages under section 2(1) may also be reduced to reflect the claimant's contributory negligence (Gran Gelato Ltd v Richcliff Group Ltd [1992] Ch 560).