Banking and finance – Deceit – Loss of profits – Investment companies

1) Parabola Investments Ltd (claimant) (2) Aria Investments Ltd (formerly Tangent Investments Ltd) (claimant/respondent) v (1) Browallia Cal Ltd (formerly Union Cal Ltd) (defendant) (2) MF Global UK Ltd (formerly Man Financial Ltd) (3) Matthew Bomford (defendants/appellants) CA (Civ Div) (Lords Justice Mummery, Toulson, Rimer): 5 May 2010

The appellants (M and B) appealed against a decision ([2009] EWHC 901 (Comm), [2009] 2 All ER (Comm) 589 giving judgment for the respondent (T) for damages for deceit.

T was a company that traded in stocks, shares and derivatives. M was a financial institution that employed B as a broker. T engaged in trading via M in contracts for differences. B was responsible for T’s account. B falsely represented to T that its trading was profitable when it was not and lied about how much money was in T’s account. The period of trading until the truth was discovered was just over seven months. It was agreed that the difference between the size of T’s fund for investment at the beginning and at the end of the period was £3,222,000.

On the basis that T established liability, the appellants did not dispute that it would be entitled to recover that sum with interest. T, however, claimed to have suffered considerably greater loss than would be satisfied by an award of interest. First, from its lost opportunity to have traded with the fund as it would otherwise have done during the seven-month period, stage one, and, second, from its lost opportunities for trading during the period from the termination of its relationship with M until the trial, stage two.

The judge held that T was entitled to recover lost profits both for stage one and stage two. He gave permission to appeal on the question of whether T could recover damages for loss of the profits which he found that it would otherwise have made, after the period of the fraud, from use of the funds of which it had been defrauded. The appellants submitted that T’s loss should have been assessed at the date of discovery of the depletion of its trading fund; that to allow a claim for damages for loss of profits suffered after the discovery of the fraud would amount in substance to allowing a claim for damages for delay in the payment of damages; and that the only way that the law allowed compensation for loss of use, during stage two, of the trading fund lost during stage one was by way of an award of interest.

T submitted that B’s fraud had a continuing effect on it after the truth had come out; the depletion of its trading fund was a fait accompli, from which it could not extract itself and which had a continuing direct effect on its ability to trade profitably; in the judge’s language, it was ‘locked in’ to a disadvantageous situation as a consequence of the fraud perpetrated during stage one.

Held: (1) A defendant’s fraud might have an effect continuing after the transaction was completed, and loss based on the hypothetical use which the claimant would have made of the funds of which he was defrauded was capable of being recoverable as damages in deceit and was not necessarily too remote, Smith New Court Securities Ltd v Citibank NA [1997] AC 254 HL considered.

(2) The appellants’ argument that the claim for loss of use during stage two of the funds lost during stage one was in substance a claim for damages for delay in payment of damages was rejected, Hungerfords v Walker [1989] 171 CLR 125 HC (Aus) considered. In the present case T would have had an alternative opportunity of using its trading fund during stage one, the hypothetical value of which the judge assessed before reaching his award for the loss suffered at stage one. The effect of the fraud continued after stage one because T no longer had the amount by which the fund had been depleted, 4 Eng Ltd v Harper [2008] EWHC 915 (Ch), [2009] Ch 91 considered.

(3) The argument that there was a critical difference between the recoverability of damages for loss of use of property resulting from tortious interference with property rights and loss of use of money resulting from deceit might have some historical support, but could not be justified, Sempra Metals Ltd (formerly Metallgesellschaft Ltd) v Inland Revenue Commissioners [2007] UKHL 34, [2008] 1 AC 561 considered.

(4) T’s first head of loss was the amount of its direct loss on trades which it was induced to enter as a result of B’s fraud. That head of loss was recoverable regardless of what T would otherwise have done with its trading fund. If the claimant would not have made profitable alternative use of the money, there would be no head of consequential loss for which he would be entitled to compensation. If, on the other hand, he would have made profitable alternative use of the money, then there would be a potential head of consequential loss for which, subject to remoteness, the claimant would be entitled to damages on the normal compensatory principle. There was no asymmetry or injustice in that.

(5) The appellants had not shown any principled reason why the discovery of the fraud should be taken as a legal cut-off point terminating T’s claim for damages in respect of its loss of investment opportunity, resulting from the appellants’ fraud. Applying the fundamental compensatory principle, the judge was right to hold for the reasons he did that T was entitled in principle to recover damages in respect of its loss of investment opportunity resulting from the appellants’ fraud until trial.

Appeal dismissed.

Ali Malek QC, Jeffrey Chapman, Adam Kramer (instructed by Legal First) for the appellants; Neil Kitchener QC, Steven Elliott (instructed by Gordon Dadds) for the respondent.