4 Eng Ltd v Harper & Anor

For deceit, a claimant must establish a false representation, knowledge of its falsity, materiality, inducement, and loss or detrimental reliance. The tort is complete when the claimant acts on the representation to its detriment. Subsequent recoupment or mitigation affects the assessment of damages, not the existence of the cause of action.

In assessing damages for fraudulent misrepresentation, the transaction-date valuation rule is flexible. A later valuation may be appropriate where the fraud continues to influence the claimant or locks the claimant into the acquired asset.

A contractual notice condition is construed according to its terms. It may not extend to a warranty fraudulently given while deliberately concealing the breach.

The applicant purchased all the shares in Ironfirm Ltd, trading as Excel Engineering, from the respondents. It alleged that the respondents had participated in a corrupt scheme involving Excel and its principal customer, Mars, and that warranties in the sale agreement were false and fraudulent.

The applicant sought summary judgment on claims in deceit and breach of warranty. The respondents sought reverse summary judgment on contractual warranty claims and the alternative claim under section 2(1) of the Misrepresentation Act 1967, relying on a two-year contractual notice condition.

The principal issues were whether the warranties and representations were established to the Part 24 standard, whether the tort of deceit was complete despite possible subsequent recoupment, how loss should be valued, and whether the notice condition applied to fraudulently given warranties.

1. Summary judgment on deceit. The applicant established, to the required summary judgment standard, that the respondents had made false warranties, knew of their falsity, and materially induced the purchase. The corrupt scheme made several warranties false, including warranties concerning the ordinary conduct of the business, threatened litigation, unlawful payments, transactions with Mars, accounts, net asset value, records, and tax affairs. The relevant warranties were material, and reliance was established both by inference from materiality and by evidence.
2. The fact that the applicant did not rescind after the fraud emerged did not negate initial reliance. Rescission could become impracticable where the affairs of a private company rapidly changed after acquisition.
3. The tort of deceit was complete when the applicant entered into the sale agreement in detrimental reliance on the representations. Any later recovery or mitigation, including contractual set-off, went only to quantification of damages. It did not extinguish the completed cause of action. The court therefore ordered summary judgment for damages to be assessed in deceit.
4. In assessing damages, the transaction-date rule was not inflexible. Applying Smith New Court Securities v Scrimgeour Vickers [1997] AC 254, the continuing effect of the fraud and the applicant’s inability effectively to sell the company justified consideration of a later value. The respondents had no real prospect of showing that the company’s value should be assessed only at the purchase date.
5. The applicant also established breach of the tax warranties. Loss was not a constituent element of the contractual cause of action, although the evidence did not establish loss specifically caused by those breaches to the summary judgment standard.
6. The alternative claim under section 2(1) of the Misrepresentation Act 1967 fell away while the deceit judgment stood. The respondents’ reverse summary judgment applications concerning the general warranty claims failed. The court held that it was well arguable, and would if necessary hold, that the two-year notice condition did not apply to warranties fraudulently given while the truth and breach were deliberately concealed, applying the reasoning in Granville Oil v Davies Turner [2003] EWCA Civ 570. The cross-applications were dismissed, and further contractual proceedings were stayed pending assessment of damages on the tort basis.