Downs v Chappell

Where a fraudulent or negligent misstatement induces a claimant to enter a transaction, causation turns on the actual inducement. It is not defeated by asking whether the claimant might have acted similarly if told the truth. In a no-transaction case, damages compensate loss caused by entering the transaction, including capital and income losses up to discovery and a reasonable opportunity to avoid further loss. The normal diminution-in-value measure may be unsuitable. Foreseeable market movement is not too remote, but the court must check that the award provides indemnity rather than a windfall by comparing the represented state of affairs. A contribution under section 2 reflects both relative fault and causal responsibility.

The claimants bought a bookshop and its premises after receiving inflated trading figures from the vendor and a purported verification letter from the vendor’s accountants. The figures were false, and the accountants had no proper basis for verifying them.

At trial, liability in deceit and negligence was established. However, the claim was dismissed because the judge found that the claimants had not proved that disclosure of accurate figures would have stopped them purchasing, and had not proved loss. The judge indicated that, if liability had produced loss, the defendants should contribute equally.

The claimants appealed on causation and damages. The accountants also challenged the proposed equal contribution. The central issues were whether actual inducement established causation and how loss in a misrepresentation-induced business purchase should be assessed.

1. Appeal allowed. Hobhouse LJ held, with Roch and Butler-Sloss LJJ agreeing, that the trial judge asked the wrong causation question. In deceit, a claimant must prove a fraudulent and material representation which induced detrimental action. The materiality test is objective, but inducement is factual. Once the judge found that the false figures induced the claimants to enter the purchase, causation was established. It was wrong to substitute the hypothesis that truthful figures would have been supplied and then ask whether the claimants would nevertheless have bought.

2. The same conclusion applied to the accountants’ reckless negligence. They could not properly have provided accurate figures because they did not know them. Their proper response was that they could not verify the vendor’s figures. The claimants relied on their letter in entering the transaction, which established the relevant causal connection.

3. This was a no-transaction case. The proper starting point was the loss caused by entering the transaction which the claimants would otherwise have avoided. That could include capital and income loss. The ordinary diminution-in-value approach was unsuitable. Foreseeable fluctuations in the property market were not too remote. The claimants discovered the position by late 1989 and had an informed opportunity to sell for about £76,000 in March 1990. Their recoverable capital loss was therefore £44,000, being the difference from the £120,000 price. Later losses resulted from their own choice not to sell, unless they had been reasonably but unsuccessfully mitigating loss, which was not their case.

4. The court nevertheless applied an indemnity check. It compared the actual loss with the position if the represented trading figures had been true. This did not replace the no-transaction measure with a contractual or truthful-information test. It confirmed that £44,000 did not over-compensate the claimants, because a business performing as represented would have met its financing costs and retained its value.

5. The accountants’ appeal on contribution was dismissed. Under section 2 of the Civil Liability (Contribution) Act 1978, responsibility depends on both the seriousness of fault and its causal relevance. The vendor’s fraud was more serious, but the accountants’ reckless confirmation was what induced the purchase. An equal contribution was just and equitable.

Judgment was entered for the claimants for £44,000 damages against each defendant. The formal order recorded £70,000 including interest, with equal contribution between the defendants.

• Court of Appeal (Civil Division). In Downs v Chappell, [1996] EWCA Civ 1358, the court allowed the claimants’ appeal, awarded damages, and dismissed the accountants’ appeal against equal contribution.
• High Court, Queen’s Bench Division, King’s Lynn District Registry. Robert Owen QC found the vendor liable in deceit and the accountants liable in negligence, but dismissed the damages claims for want of causation and proved loss. He would have apportioned responsibility equally if loss had been established.