Zargaran & Anor v Fairfax Gerard Holdilngs Ltd

A claimant seeking damages for misrepresentation or breach of contract must prove an actionable representation or contractual obligation and actual loss caused by its breach. Where a financing arrangement contemplated a VAT-neutral counter-invoice, failure to issue it did not itself establish recoverable loss if the claimant could not prove that the VAT had been paid or accounted for. A possible VAT characterisation of the transaction was left undecided where the claim failed independently for want of proof of loss.

The claimants, carpet traders, obtained trade finance from the defendant in 2001. The arrangement involved the claimants invoicing carpets to an associated company and an intended counter-invoice, designed to make the VAT consequences neutral. The counter-invoice was not issued.

The claimants alleged misrepresentation and negligent misstatement, later relying on Misrepresentation Act 1957, section 2, and alleged breach of contract. They claimed £21,193, said to represent VAT which they had been required to account for. The central issues were whether the counter-invoice had been promised and whether the claimants had suffered the claimed loss.

1. The claim was dismissed. The claimants failed to prove that they had accounted to Customs & Excise for the claimed £21,193 and therefore failed to establish loss.

2. The court found that the defendant had represented, and had contractually undertaken, that an associated company would issue a counter-invoice with reservation of title immediately after the claimants’ invoice and receipt of the advance. The purpose was to ensure that the transaction was VAT neutral. No counter-invoice was issued.

3. The misrepresentation claim nevertheless failed. The representation would have been true if the loan had been repaid, because the counter-invoice would have enabled recovery of input VAT. If the loan remained unpaid, bad-debt relief could have reversed that recovery. The claimants therefore had to prove an actual loss caused by the failure to issue the counter-invoice.

4. On the evidence, including the absence of VAT returns or other independent documentary evidence, the court found it probable that the claimants had neither paid nor accounted for the VAT. They had consequently suffered no proved loss.

5. The contractual claim failed for the same reason. If the counter-invoice had been issued, the maximum possible recovery would have been interest on the VAT sum during the period between an input-tax recovery and its later repayment following bad-debt relief. No such loss was proved.

6. The court did not decide definitively whether the transaction was a genuine sale of goods or a security transaction outside the VAT legislation. Even if the alleged VAT misrepresentation had been established on that alternative case, the absence of proved loss was fatal.