Pankhania & Anor v Hackney & Anor

Damages for negligent misrepresentation under section 2(1) of the Misrepresentation Act 1967 are assessed on the same basis as damages for fraud. The overriding rule is compensation for all loss flowing directly from the claimant’s change of position. The difference between the price paid and the true value at the transaction date remains the normal measure, but it is only a method of applying that rule. It should be used where it produces a fair result. The court should consider whether the misrepresentation continued to operate or whether the claimant was locked into the transaction. Mitigation and avoided loss remain relevant, but the normal measure is not reduced merely because subsequent events avoided losses already reflected in the valuation. A broad assessment is sufficient; a precise alternative calculation is unnecessary where the normal measure fairly represents the loss.

The claimants purchased adjoining properties at auction after the defendants represented that an occupier of one property held only a contractual licence terminable on three months’ notice. The occupier in fact held a protected tenancy under Part II of the Landlord and Tenant Act 1954. Liability under section 2(1) of the Misrepresentation Act 1967 had been established at an earlier trial, and the present issue was assessment of damages.

The claimants sought the difference between the properties’ represented value and their true value subject to the tenancy. The defendants argued that damages should be limited to the reasonable or actual cost of obtaining possession, applying mitigation and avoided-loss principles. The central issue was whether the normal valuation measure gave fair compensation in the circumstances.

1. Damages and governing principle. The court was bound by Royscott Trust Ltd v Rogerson [1991] 2 Q.B. 297 to assess section 2(1) damages as if they were damages for fraudulent misrepresentation. Under Smith New Court Securities Limited v Citibank N.A. [1997] A.C. 254, the overriding rule is recovery of the financial loss flowing directly from the transaction. The price-paid-less-true-value measure is a normal method, not a separate legal measure.
2. Fairness of the normal measure. The normal measure may be inappropriate where the misrepresentation continues to operate after acquisition or where the claimant is locked into the transaction. Neither circumstance existed. The misrepresentation was discovered shortly after completion and the properties could have been resold subject to the tenancy.
3. Mitigation and avoided loss. The principles of mitigation apply, but the claimant’s conduct is not to be assessed with excessive precision. Where the normal measure is appropriate, it is not reduced merely because particular losses were subsequently avoided. The court should take a general view of what losses would have been recoverable under the overriding compensatory principle and ask whether the normal measure broadly represents them. A scientific comparison of alternative calculations is unnecessary.
4. Application. The valuation evidence already allowed for delay, finance costs, construction costs and the expense of obtaining possession from the occupier. The claimants acted reasonably in pursuing possession and development. The true value subject to the tenancy was assessed at £3.425 million, against an agreed represented value of £3.925 million.
5. Order. Damages under section 2(1) were assessed at £500,000. Interest was left for further argument if not agreed.

Liability had previously been determined by Mr Rex Tedd QC, sitting as a deputy High Court judge, on 31 July 2002. The present judgment assessed the damages flowing from that liability finding.