Court of Appeal considers damages for deceit in the context of contractual warranties

A recent Court of Appeal decision is a useful reminder of the principles the court will apply when assessing damages for deceit / fraudulent misrepresentation in the context of corporate acquisitions and other asset purchases: MDW Holdings Limited v James Robert Norvill, Jane Rosemary Norvill and Stephen John Norvill [2022] EWCA Civ 883.

The decision illustrates that, while in some cases the amount of damages recoverable in respect of false warranties will be the same under both a claim for the tort of deceit and a contractual claim for breach of warranty, that will not always be the case.

In particular, in cases where the claimant would still have entered into the transaction (albeit at a lower price) if it had known the true position, tortious damages for deceit will usually be the difference between the price paid and the price the purchaser would have paid (as distinct from the objective true value of the asset, which is the relevant comparator in tort claims where the transaction would not have proceeded and in contractual warranty claims).

Those differences should be borne in mind by potential claimants when deciding which causes of action to plead and assessing what evidence they will need to adduce in support of the damages claim.

Background

Full details of the claim are set out in this post on our Litigation Notes blog.

Essentially, it concerned seller's warranties in a share purchase agreement in a corporate acquisition, including as to the company's compliance with certain laws and regulations. The High Court found the seller liable for breach of warranty and deceit / fraudulent misrepresentation.

The judge applied the orthodox principle that damages for breach of warranty should be assessed by reference to the difference between the value of the company if the warranties had been true (the “Warranty True Value”) and its actual value given their falsity (the “Warranty False Value”).  The same measure was applied to the deceit finding, given the parties' agreement that the contractual and tortious measures of damages would produce the same result in this case (on the basis of a shared assumption that the price paid reflected the company's value if the warranties had been true).

The primary appeal concerned the seller's argument that the damages should be reduced to reflect the fact that certain risks that the court found had lowered the true value of the company at the date of sale had not in fact subsequently materialised.  The Court of Appeal rejected that, holding that damages should not ordinarily be reduced on account of such post- transaction developments except in limited circumstances. (For discussion of this aspect of the decision, see the separate blog post mentioned above).

However, the purchaser also cross-appealed on the basis that the High Court had found, contrary to the parties' shared assumption, that the company's value if the warranties had been true was in fact less than price paid. The purchaser argued that this meant that the contractual and tortious measures of damages would not necessarily produce the same result, so that (i) given the deceit finding, the judge ought to have then applied the tortious measure (ii) under that measure, damages should be the difference between the price paid and the Warranty False Value, rather than the (smaller) difference between the Warranty True Value and the Warranty False Value.

Decision (re deceit)

The Court of Appeal accepted that it was open to the purchaser to contend on appeal for assessment on the tort basis, noting that that had been included in its pleaded case.

The court proceeded to consider the position under the orthodox principle that tortious damages must put the claimant in the position it would have been in had it not suffered the relevant wrong.

The court recognised that where a claimant has been induced by deceit to purchase an asset that it would not otherwise have purchased, damages will usually be the difference between the price paid and the actual value of the asset (plus any damages for consequential losses). If, however, in the absence of deceit the claimant would have proceeded with the purchase, the tortious measure requires damages to be assessed by reference to the difference between the price paid and the price that the purchaser would have paid had it known the truth.

The first instance judge had made no finding as to what the purchaser would have done if it had known the truth. As a result, the court allowed the purchaser's cross-appeal and remitted to the High Court the question of whether the purchaser was entitled to additional damages for deceit.