Court of Appeal rejects novel argument that fraud victims should give credit for the "time value" of cash received as part of a fraudulent transaction

In the context of a claim brought by the victim of a fraud against the perpetrator, seeking damages for consequential loss of investment opportunity in relation to certain fraudulent transactions, the Court of Appeal has dismissed an appeal by the fraudster on the basis that the victim was obliged to give credit not only for the cash they received as part of the fraudulent transactions, but also for the "time value" of that money in the period between the transaction and the trial: Tuke v Hood [2022] EWCA Civ 23.

This decision will be noteworthy for financial institutions for the Court of Appeal's analysis as to the correct calculation of damages in deceit claims, particularly in the context of mis-selling disputes, shareholder claims and the increasing number of fraud claims emerging from the Covid-19 pandemic. The Court of Appeal found that where the measure of damages is reflected by comparing the value of what was sold with the value of what was received, the innocent party must simply give credit for the money (or money's worth) they received under the transaction itself, in order to reflect the position as it would have been if the deceit had not occurred.

The Court of Appeal referred to the classic modern statement of the applicable principles when assessing damages for deceit in Smith New Court Ltd v Scrimgeour Vickers [1997] AC 254. Smith New Court confirmed that the time at which credit is to be given for the benefits received by the innocent party is normally the date of the fraudulently induced transaction (although this is not an inflexible rule and a different date may be adopted if taking the date of the transaction would under-compensate the victim). The Court of Appeal noted that Smith New Court did not say anything about the innocent party having to give credit for benefits received against claims for consequential losses.

The suggestion in the present case that, unless the victim gave credit for the time value of the money received, they would be overcompensated, was a novel one. The Court of Appeal found it to be fundamentally misconceived and contrary to principle. In the court's view, a claimant would not be fully compensated if they were required to give any credit for the time value of the money received.

We consider the decision in more detail below.

Background

Between 2009 and 2012, the claimant, Mr Tuke purchased a number of classic cars as investments either from or through a specialist classic car dealership, JD Classics Ltd (JDC), which was founded and run by the defendant, Mr Hood.

In 2011, on Mr Hood's suggestion, Mr Tuke entered into a transaction which involved him borrowing £8 million from a finance company to purchase 5 Jaguar racing cars for £10 million. It later transpired that Mr Hood had deceived Mr Tuke into buying the cars for far more than they were worth, having provided Mr Tuke with bogus valuations. In order to repay the loan from the finance company, Mr Tuke was obliged to sell a number of his classic cars and was induced to sell all but one to JDC at an undervalue.

Mr Tuke subsequently brought a claim against Mr Hood for deceit, dishonest assistance in breach of fiduciary duty, knowing receipt and conversion. Mr Tuke sought damages including for loss of investment opportunity. Mr Tuke's case was that if he had not been defrauded, he would have sought to retain particular cars which would have substantially increased in value.

High Court decision

The High Court found that Mr Hood had deceived Mr Tuke on many occasions over many years in flagrant breach of the trust that had been placed in him. The High Court said that Mr Hood was liable in both deceit and dishonest assistance in JDC's breaches of trust in relation to a number of transactions. The High Court also said that, but for the fraud, Mr Tuke would have been able to keep many of the cars until 2020 or at least until 2015/2016 by which time the market had risen significantly.

The High Court quantified the "base claims" in respect of the loss made on the sales at an undervalue in the normal way, by comparing the market value of the cars at the date of sale to the true value of the consideration received for them.

In relation to the claim for consequential loss of investment opportunity, the High Court compared the market value of each car with its 2020 value, which reflected the subsequent enhancement in value of the investment, before applying a 25% discount for uncertainties.

Mr Hood appealed against the High Court's decision. Mr Hood contended that the High Court, when assessing loss of investment opportunity, should have taken into account the notional benefit that Mr Tuke received over time from the cash element of the consideration he received for the investment cars and that this resulted in Mr Tuke being overcompensated.

Court of Appeal decision

The Court of Appeal found in favour of Mr Tuke and dismissed the appeal by Mr Hood.

The key issues which will be of interest to financial institutions are set out below.

Legal principles on the calculation of damages for deceit

The Court of Appeal noted that the aim of an award of damages for deceit is to put the claimant in the position in which he would have been if no dishonest representations had been made to him.

The Court of Appeal then went on to highlight the following key legal principles relating to the assessment of damages for deceit:

• In assessing damages, the claimant must give credit for any benefits which he has received as a result of the transaction. The time at which credit is to be given for the benefits is normally the date of the fraudulently induced transaction, but this is not an inflexible rule (as per Smith New Court).
• A defendant who wishes to assert that post-breach events have reduced a recoverable loss must plead as well as prove it (as per OMV Petrom SA v Glencore International AG (Rev 1) [2016] EWCA Civ 778).

Application of legal principles on the calculation of damages for deceit to the present case

The Court of Appeal held that all that the innocent party is required to do, in order to reflect the position as it would have been if the deceit had not occurred, in a case where the measure of damages is reflected by comparing the value of what was sold with the value of what was received, is to give credit for the money (or money's worth) he received under the transaction itself.

The Court of Appeal felt that Mr Hood should not be rewarded for his dishonest behaviour by the reduction of his liability, especially if to do so would result in Mr Tuke not receiving the full value of loss. Requiring Mr Tuke to give credit for the hypothetical "time value" of the cash he received from JDC under the relevant transactions would result in his not receiving full credit for the loss of investment opportunity. That would be directly contrary to the policy of seeking to award the innocent party full compensation for the wrong suffered in cases of dishonesty.

The Court of Appeal observed that in this case, but for Mr Hood's fraudulent misrepresentations, Mr Tuke would not have taken out the loan and he would not have had to sell all but one of his investment cars to repay the loan. Also, Mr Hood had not pleaded or proved that post-breach events had reduced a recoverable loss.

The Court of Appeal noted that Smith New Court did not say anything about the innocent party having to give credit for benefits received against claims for consequential losses. Once the value of the cash benefit received by Mr Tuke when he sold the cars was taken into account in the basic computation of loss, there was no justification for taking into account its value over time. There was also no reason to give credit for the "time value" of the cash benefit when assessing the further loss of the chance of making a capital gain from keeping the cars rather than selling them.

Further, the Court of Appeal said that as a matter of principle a claimant is only required to give credit for a benefit that results from and is intrinsic to a transaction. What Mr Tuke did, or may have done, with the cash he received for the cars was irrelevant. Any gains or losses would be as a result of Mr Tuke's own independent acts and decisions. The time value of the cash received had insufficient nexus with the fraudulent transactions and was not a benefit received under those transactions. In any event, the loss of investment opportunity was not an award calculated by reference to the passage of time as such, but was a claim for the loss of the cars' appreciation in capital.

The Court of Appeal also commented that the analogy made by Mr Hood with awards of interest was deeply flawed. Mr Hood had contended that the "time value" should be calculated either in the same way as Mr Tuke was awarded compound interest on the equitable compensation for Mr Hood's dishonest assistance in breaches of fiduciary duty of JDC, or in the same manner as discretionary interest under statute. Firstly, the loss of investment opportunity claim was an alternative to a claim for interest on the base damages awarded. Secondly, the discretionary award of interest on a debt or damages under s.35A of the Senior Courts Act 1981 is purely the creature of statute. There is no discretion at common law to make such an award to a claimant for the loss of use of money over time, if the claim is not a claim for "debt or damages" within the meaning of s.35A (as per Odyssey Aviation Ltd v GFG 373 Ltd [2019] EWHC 1980). Thirdly, if interest is claimed at common law as damages for later payment of a debt, the actual losses must be pleaded and proven (as per Sempra Metals Ltd v Inland Revenue Commissioners and another [2007] UKHL 34). The Court of Appeal found it difficult to see how there could be any power to compute the supposed "time value" of a cash receipt by the innocent party and credit it to the dishonest defendant, especially in an evidential vacuum. The analogy with compound interest was even more difficult to maintain, given that compound interest is an award in equity designed as a means of discouraging dishonest behaviour. There was no reason for the innocent victim of the fraud to be put on the same footing as the fraudster and treated as if he had received compound interest on any cash he had received as part of the fraudulent transaction.

Finally, the Court of Appeal said that policy considerations strongly militated against requiring credit to be given by the injured party for the notional time value of the money. That would incentivise the fraudster to lengthen the time between the fraudulent transaction and the award of damages, because the longer that period, the higher the credit. A fraudster should not be encouraged to prevaricate or to conceal his wrongdoing.

Accordingly, for the reasons above, the Court of Appeal found in favour of Mr Tuke and dismissed the appeal by Mr Hood.