Damages in Fraudulent Misrepresentation Cases

To bring home courts’ disapproval of such conduct, the measure of damages for fraudulent misrepresentation is higher than that which might be recovered arising from a breach of contract. The deceived party is not only not entitled to profit from the fraud (such as in investment cases), but recovery of loss is generally awarded at a higher level due to the method calculation of losses sustained.

Differences between Tort and Contract

The law takes a different approach to determining the measure of damages cases of fraud. Indeed the application of the relevant principles results in damages being higher than those for negligence, which is also a tort. The differences between the assessment of damages in contract law and the tort are:

1. In contract, the damage is assessed by what the parties would have seen as the damage being caused by a breach at the time the contract was formed: the date of the contract. In actions for the tort, damage is assessed by reference to the date the tort was committed. This difference means that the time of assessment of damages is when the relevant fraudulent act is committed and not at a fixed date;
2. The correct measures of damages in tort is the sum that would place the claimant in the position they would have been in if the fraudulent representation had not taken place; this contrasts with the position in contract, where the award is the sum that would place the claimant in the position they would have been in of the warranty or condition were true; and
3. In tortious claims, compound interest may be awarded as opposed to the standard of simple interest.

The end result is that claimant is entitled to recover their whole entire loss of sums that they are out of pocket, rather than simply what they expected to gain under a contract.

Entering into the contract knowing that the representation is fraudulent does not preclude recovery. Often, a businesses contract with the defendant will be entered into in reliance of statements by third parties who have a relationship with the defendant. They are also potentially liable for the deceit.

No Resultant Contract from Fraudulent Misrepresentation

Where no contract has resulted from deceitful conduct, the measure of damages is the damage that the innocent party can show resulted from the fraudulent inducement.

Thus expenses incurred in reliance of the inducement may be recovered, such as valuation fees and legal fees, along with lost profits.

In one case, the claimant, who was a printer, was falsely informed by the defendant that they were entitled to reproduce articles protected by intellectual property rights. The printer was entitled to recover for losses that he expected to make from the contract as well as their expenses preparing for the performance of the contract.

Where the deception leads to permanent loss of goods, the claimant is entitled to recover the market value of the goods lost.

Sales of Assets and Services under Contract

Where the contract is for something other than shares, the measure of damages remains the same: the value transferred, less the value received.

Consequential loss is also recoverable, provided that it is not too remote. This touchstone for consequential loss is whether the loss would have taken place in the ordinary course of events. Instances of losses recovered include refit expenses where a ship was purchased for international trade; and where a business or shares are purchased in reliance of a deceitful conduct, the expenses incurred and capital losses may also be recovered.

Investment Fraud Example

To take an illustration of how damages for fraudulent misrepresentation are calculated, in a sale of shares, the proper sum for damages in contract is the sum paid less the market value of the shares. Where the transaction is tainted by fraud, the purchase price is reduced by the actual value of the shares (if any) at the time of purchase.

The date at which these sums are calculated is at the date of the allotment of the shares. The actual value of the shares is the value of the shares if the defendant knew the truth of the factitious circumstances that deceptively gave value to the shares. The actual value of the shares may well be nil. The damages claim would include the sum paid and any other relevant expense.

The reason courts use the actual value rather than the market value of the shares is because the market value is not necessarily the relevant marker to which the actual value of the shares may be attached, because of the factitious and delusive circumstances of the valuation. The market value is evidence of value and not proof of it.

The tortious approach to calculating damages essentially indemnifies the innocent party from losses on the transaction.

Conclusions

Such are the ways and means that damage may arise from fraudulent conduct, the assessment of damages and loss to a party are entirely reliant on the circumstances of the case. Tortious loss is usually greater than that which would be awarded in contract cases. No two cases are different and require an independent calculation of the damage suffered by the particular defendant.