Downs v Chappell

A material fraudulent representation establishes causation where it induces the claimant to act to his detriment. The claimant need not additionally prove that disclosure of the truth would have prevented the transaction. Where fraudulent or negligent misrepresentation causes entry into a transaction which would otherwise have been avoided, damages may include consequential capital and income losses, including foreseeable market depreciation. Recovery remains subject to causation and the compensatory principle. An informed, independent decision to retain the acquisition after an opportunity to sell may end the defendant’s responsibility for subsequent losses. Comparing the actual loss with the position had the represented facts been true can check against overcompensation without introducing a contractual measure of damages.

Contribution depends on both the seriousness of each defendant’s fault and its causative impact.

Mr and Mrs Downs purchased a bookshop and its freehold premises from Mr Chappell. They required independent verification of the business’s trading figures before proceeding. At Mr Chappell’s request, his accountants, Stephenson Smart, supplied a letter purporting to verify turnover and profitability. Mr Chappell knew that the figures were false. The accountants had no proper basis for their statements and were recklessly negligent.

The purchasers claimed damages against Mr Chappell in deceit and against the accountants in negligence. Robert Owen QC, sitting as a deputy judge in the Queen’s Bench Division, found that the representations induced the purchase. He nevertheless dismissed the claims because the purchasers had not established that they would have withdrawn if given the true figures. He also found that they had proved no attributable loss.

The purchasers appealed on causation and damages. Liability findings were accepted by both defendants. The accountants also challenged the judge’s provisional assessment of equal contribution between the defendants. The central issues were the proper counterfactual for causation, recovery of consequential losses from an unviable business and depreciating property, and the point at which an informed opportunity to sell ended responsibility for further loss.

1. The purchasers’ appeal against both defendants was allowed unanimously. Hobhouse LJ delivered the substantive judgment, with which Roch and Butler-Sloss LJJ agreed. The accountants’ appeal against equal contribution was dismissed.

2. Deceit required a fraudulent, material representation which induced detrimental action. Materiality was objective; inducement was a question of fact. The judge had found that the fraudulent representations induced the purchase. He therefore erred in requiring additional proof that the purchasers would have withdrawn if told the truth.

   The negligence claim likewise required the correct counterfactual. The accountants could properly have said only that they could not verify the figures. It was factually and legally wrong to assume that they could have supplied accurate figures. The finding that the purchasers relied on their letter established its causal relationship with entry into the transaction.

3. This was a no-transaction case. Damages started with the loss caused by entering into the purchase, rather than the difference between price and value at acquisition. The principles illustrated by Doyle v Olby, Esso Petroleum v Marden and Hayes v Dodd permitted recovery of consequential capital and income losses. Foreseeable market depreciation could enter the assessment, as the reasoning in Banque Bruxelles v Eagle Star confirmed. No issue of remoteness arose on these facts.

4. The business could not generate enough income to meet the purchasers’ financing commitments and provide their living. By March 1990 they knew the true position and had an opportunity to sell for £76,000. Their capital loss was therefore £44,000. They had sustained no actual income-account loss by that point.

   Their informed decision to retain the property exhausted the representations’ causative effect. Even reasonable rejection of the offers did not make the defendants responsible for later depreciation. Further losses from reasonable but unsuccessful mitigation might have been recoverable, but that basis was unavailable on these facts.

5. A further check against overcompensation remained appropriate. Comparing the loss with the position had the represented facts been true tested whether it was attributable to the wrong. This preserved the indemnity principle without substituting contractual expectation damages. The comparison also had to respect risks imposed or obscured by the wrong. Here it confirmed that £44,000 represented compensatory loss.

6. Under section 2 of the Civil Liability (Contribution) Act 1978, responsibility depended on both seriousness of fault and causative impact. The accountants’ reckless verification had greater immediate causative importance, while Mr Chappell’s fraud was more serious. Equal contribution was justified.

   Judgment was entered for the purchasers against both defendants. The final order awarded £70,000 including interest, with equal contribution between the defendants and costs to the purchasers here and below.

1. Court of Appeal: In Downs v Chappell, [1996] EWCA Civ 1358, [1997] 1 WLR 426 , unanimously allowed the purchasers’ appeal and entered judgment against both defendants. Dismissed the accountants’ appeal against equal contribution.
2. High Court, Queen’s Bench Division, King’s Lynn District Registry: Robert Owen QC, sitting as a deputy judge, found liability in deceit and negligence but entered judgment for the defendants because causation and attributable loss had not been proved. He provisionally assessed contribution equally if damages liability were established. No citation for that decision was supplied.