Smith New Court Securities Ltd v Scrimgeour Vickers (Asset Management) Ltd (Smith New Court Securities Ltd v Citibank NA)

Damages for deceit protect the claimant’s negative interest. The defendant must compensate all actual loss directly caused by entry into the fraudulently induced transaction, whether or not that loss was reasonably foreseeable. The claimant cannot recover the represented bargain’s value.

The usual calculation of price paid less the property’s value at acquisition is a practical starting point, not an inflexible rule. A later valuation or actual resale proceeds may be used where the fraud continued to influence the claimant or locked the claimant into retaining the property. Consequential loss is recoverable, subject to direct causation and reasonable mitigation after discovery of the fraud.

Appellate courts remain reluctant to disturb concurrent factual findings unless a material misdirection justifies reconsideration.

Smith New Court Securities Ltd bought approximately 28 million Ferranti shares from Citibank NA for about £23 million after Citibank’s representative falsely described competing bids. An unknown, pre-existing fraud against Ferranti subsequently became public and caused the shares’ value to collapse. Smith sold the shares progressively for about £11.8 million.

Chadwick J held that two fraudulent representations induced the purchase and awarded £10,764,005: [1992] B.C.L.C. 1104. The Court of Appeal upheld liability on wider factual grounds but reduced damages to £1,196,010 by valuing the shares at the transaction date: [1994] 1 W.L.R. 1271.

The House considered whether the later loss directly flowed from the fraudulently induced transaction and whether the concurrent findings of fraudulent inducement should stand.

1. Disposition. The House unanimously allowed Smith’s appeal on damages, dismissed Citibank’s cross-appeal on liability and restored Chadwick J’s order awarding £10,764,005.

2. Liability. Lord Steyn held that the first alleged representation had not been established in sufficiently unequivocal terms. The concurrent findings that the second and third representations were fraudulent, actionable and causative were unassailable. Smith would have withdrawn from the transaction without them. Lord Browne-Wilkinson, Lord Keith, Lord Mustill and Lord Slynn agreed that those representations established deceit.

3. Measure of damages. Lord Browne-Wilkinson held that the defendant must repair all damage directly caused by entry into a fraudulently induced transaction. Foreseeability does not limit recovery. The claimant recovers the price paid, gives credit for benefits received and may recover consequential loss. The normal credit is the property’s market value when acquired, but that is a general method rather than an inflexible legal rule. It ordinarily gives way where the representation continued to operate or the fraud locked the claimant into retaining the property. Reasonable mitigation is required once the fraud is discovered.

   Lord Steyn reached the same conclusion by treating the governing measure as restoration of the claimant’s negative interest. The transaction-date valuation is only a second-order method for applying the overriding compensatory principle. The House applied and approved the principles of Doyle v Olby (Ironmongers) Ltd [1969] 2 QB 158. It disapproved the additional hypothetical comparison with the represented state of affairs adopted in Downs v Chappell [1996] 3 All ER 344.

4. Causation and application. The undisclosed fraud against Ferranti pre-dated Smith’s purchase, so the shares already contained the source of the subsequent collapse. Citibank’s fraud induced Smith to buy them as a market-making risk at a price which made immediate commercial disposal impracticable. Smith was therefore locked into the investment. Its reasonable retention and resale did not break causation, and the loss represented by the purchase price less actual resale proceeds flowed directly from Citibank’s deceit.

5. Amount. The direct-loss calculation produced approximately £11.3 million. Smith had not appealed against the trial award, so recovery remained capped at £10,764,005. Lord Mustill agreed with the result and commended Lord Browne-Wilkinson’s seven propositions as the better future guide, while cautioning that Doyle v Olby should not be treated as an invariable answer to every damages problem.

• House of Lords: Allowed Smith’s damages appeal, dismissed Citibank’s liability cross-appeal and restored the trial judge’s order for £10,764,005: [1997] AC 254.
• Court of Appeal: Upheld liability, found all three alleged representations fraudulent and causative, but reduced damages to £1,196,010 by applying transaction-date valuation: [1994] 1 W.L.R. 1271.
• High Court, Chancery Division: Chadwick J found that the second and third representations, but not the first, were established and awarded £10,764,005: [1992] B.C.L.C. 1104.