Smith New Court Securities v. Scrimgeour Vickers

The House of Lords upheld liability for fraudulent misrepresentation in respect of the second and third representations made by Citibank's agent and dismissed the cross-appeal on liability. It held that, where a plaintiff has acquired property in reliance on a fraudulent misrepresentation, the defendant must make reparation for all the actual damage directly flowing from the transaction, subject to causation, remoteness and mitigation. The court declined to treat the market value at the transaction date as an inflexible rule: where the fraud causes the plaintiff to be effectively "locked into" the asset or the misrepresentation continues to operate after acquisition, it may be appropriate to value the asset by reference to subsequent realisations rather than the open market price on the acquisition date.

The House applied and affirmed the principles in Doyle v. Olby (Ironmongers) Ltd., emphasising that the plaintiff is entitled to the negative interest measure (putting the plaintiff in the position he would have been in had the misrepresentation not been made), must give credit for benefits actually received, must mitigate once aware of the fraud, and that damages for deceit are not restricted by foreseeability.

Background and parties: Smith New Court Securities Ltd. (purchaser and appellant on damages) bought 28,141,424 Ferranti shares from Citibank N.A. (vendor, represented by Mr. Roberts) on 21 July 1989. Unknown to purchasers and the market, Ferranti had been the subject of a prior fraud by a third party (the Guerin fraud) whose disclosure in September–November 1989 caused the share price to collapse. Smith retained the shares and thereafter sold them in small parcels between November 1989 and April 1990, realising proceeds substantially below the purchase price.

Procedural posture: Trial before Chadwick J (judgment: [1992] B.C.L.C. 1104) found actionable fraudulent misrepresentations inducing the purchase and assessed damages using a hindsight valuation of the shares at the transaction date. The Court of Appeal ([1994] 1 W.L.R. 1271) affirmed liability but held the correct measure of damages, as a general rule for quoted shares, was the difference between the contract price and the market value on the acquisition date (absent defendant-caused market falsity). Smith appealed on the measure of damages; Citibank cross‑appealed on liability.

Nature of the claim and remedy sought: Smith sought damages for deceit (rescission had been pursued earlier but abandoned at trial). The principal legal issue was the correct measure of damages where property is acquired in reliance on fraudulent misrepresentation and the market price at acquisition was distorted by an independent, unknown latent defect (the Guerin fraud).

• (i) Issues framed by the court: whether the first, second and third alleged representations were fraudulent and induced the purchase; and what measure of damages applies when an acquired asset was already defective at the time of acquisition because of a third-party fraud.
• (ii) Court’s reasoning on liability: the House affirmed that the second and third representations were fraudulent and induced the purchase; the first representation (earlier telephone call) was not established in sufficiently clear terms to form the basis of deceit in the view of at least one speech, but this did not affect the outcome because the midday misrepresentations induced the contract.
• (iii) Court’s reasoning on damages: the House rejected a rigid rule that market value at the transaction date must always be used. Applying the tort measure of Doyle v. Olby, the court held that the defendant is liable for all actual losses directly flowing from the fraudulent inducement, including consequential losses, provided causation and mitigation rules are satisfied. Because Smith had bought as a market‑making risk and was effectively locked into the parcel at the transaction price, it was appropriate to give Smith credit for the actual resale proceeds rather than a hypothetical market value at the transaction date. The appeal on damages was allowed to that extent, but the award was limited to the judge's assessed figure in respect of the sum not appealed.

Wider context: the House explained that the 19th century cases which treated the transaction-date valuation as inflexible were to be read narrowly; Doyle v. Olby provides the modern framework. The judgment emphasises causation, remoteness and the duty to mitigate as limiting principles even in deceit cases.

The House allowed Smith's appeal on the measure of damages and dismissed Citibank's cross-appeal on liability. Rationale: the correct measure for deceit is reparation for all actual loss directly flowing from the fraudulent inducement (Doyle v. Olby), subject to causation, remoteness and mitigation; where the plaintiff is locked into the asset or the misrepresentation continues to operate after acquisition, credit should be given for actual resale proceeds rather than an inflexible market value at the transaction date. The judge's overall order on damages was restored but limited by the figure not appealed against.

Trial: Chadwick J, judgment reported at [1992] B.C.L.C. 1104. Court of Appeal: Nourse, Rose and Hoffmann L.JJ., [1994] 1 W.L.R. 1271 (appeal on liability and damages). House of Lords: [1996] UKHL 3; appeal allowed in part on damages and cross-appeal on liability dismissed.