East v Maurer

In an action for deceit, damages compensate the claimant for all actual loss directly caused by the fraudulent inducement. They are not confined by the contractual rule of reasonable contemplation. The recoverable loss may include profits foregone because the claimant was prevented from pursuing a profitable alternative business.

The assessment must compare the claimant’s actual position with the position absent the fraud. It must not assume that the acquired business would have retained its former custom. Profits should be assessed broadly, with proper allowance for the claimant’s experience, the market, clientele and competition.

The defendants sold a Bournemouth hairdressing salon to the plaintiffs for £20,000. The first defendant falsely represented that he would not continue to work locally as a stylist, although he intended to work full time at his other nearby salon. The trial judge found knowing misrepresentation and awarded damages, including £15,000 for lost profits during the period in which the plaintiffs tried to operate the business.

The defendants appealed only against the lost-profits award. They contended that lost profits were irrecoverable in deceit and, alternatively, that the judge had adopted an excessive and incorrect basis of assessment. The central issue was whether, and on what basis, profits lost through a fraudulent inducement to buy a business could be recovered.

Appeal allowed in part. Beldam LJ gave the principal judgment. Butler-Sloss LJ agreed, and Mustill LJ agreed while giving additional reasons. The court reduced the award for lost profits from £15,000 to £10,000.

1. Damages for deceit differ from contractual expectation damages. They compensate all actual loss directly flowing from the fraudulent inducement, subject to credit for benefits received. The defendant cannot invoke contractual foreseeability to exclude a direct loss.

2. Loss of profits is not excluded merely because the action is one for deceit. Here, the relevant loss was the profit which the plaintiffs could reasonably have earned from a comparable Bournemouth business which they would have acquired had they not been induced to buy the Exeter Road salon.

3. The trial judge had, however, placed too much weight on the profits that the first defendant had earned from the particular business sold. The representation did not warrant that its customers would remain at Exeter Road. The assessment had to reflect the second plaintiff’s more limited experience, her unfamiliarity with the area and clientele, and competition from other salons.

4. Mustill LJ explained that the proper method was to compare the plaintiffs’ actual position with their position had the fraud not occurred. On that comparison, profits from the hypothetical alternative business were in principle recoverable. The quantification was necessarily a broad, in-the-round assessment rather than a mathematical exercise.

The order allowed the appeal to that limited extent. The appellants were awarded half their appeal costs, not enforceable without leave.

• Court of Appeal (Civil Division) In [1990] EWCA Civ 6, allowed the defendants’ appeal only as to the amount awarded for lost profits and substituted £10,000 for £15,000.
• High Court, Queen’s Bench Division The deputy High Court judge found that the defendants had knowingly made false representations inducing the purchase and awarded damages, including £15,000 for lost profits.