ASSESSMENT OF DAMAGES FOR
MISREPRESENTATIONS INDUCING CONTRACTS
D W McLAUCHLAN*
I
INTRODUCTION
The purpose of this article is to identify and analyse some of the issues
that arise in relation to assessment of damages for actionable misrepresentations inducing contracts, particularly in light of developments in the
Commonwealth authorities over recent years. The article considers both
the measure of damages recoverable for the torts of negligent and
fraudulent misrepresentation and the related body of rules governing
damages for representations which are, or are deemed by statute to be, terms
of a concluded contract between the representor and representee. It is also
proposed to use the issues discussed as a vehicle for generating some observations about the general relationship between damages for breach of contract and damages for tort.
As Cooke J has recently observed:!
The assessment of damages is a pragmatic subject in tort as in contract. It does not
lend itself to hard-and-fast rules, although in some standard situations experience has
led the Courts to evolve prima facie rules . . . .
Subject to this qualification, the law governing assessment of damages for
misrepresentation would generally be regarded as well settled and reasonably predictable in its operation, 2 though perhaps in need of some
rationalisation (along with the remainder of the substantive rules governing liability for misrepresentation) in view of the somewhat artificial distinctions between tort and contract actions. Nevertheless, the writer has found
that on a number of important issues of principle there is much uncertainty
and considerable conflict in the authorities.
Before embarking on a discussion of these issues, it is first necessary
to canvass some of the basic and relatively non-controversial rules.
1 The causes of action for misrepresentation at common law
Where a person is induced by a misrepresentation to enter into a con-,
tract and he seeks compensation for a resulting "loss", a number of causes
*
Professor of Law, Victoria University of Wellington. This article has its origins in discussions, correspondence and exchange of drafts during the period 1978-1982 between the
writer and Professor D J Mullan of Queen's University, Canada. We planned to write
a joint article but, unfortunately, we never managed to complete it. Much of the credit
for any good points in this article probably belongs to Professor Mullan. Naturally,t
however, the writer accepts responsibility for all errors or other inadequacies.
1 Takaro Properties Ltd v Rowling [1986] 1 NZLR 22 at 69.
2 The best discussion will be found in McGregor on Damages (14th ed 1980) ch 39. See
also Waddams, The Law oj Damages (1983) at paras 577-605.
Damages for Misrepresentations
371
of action may be available to him at common law. If the misrepresentation is fraudulent or negligent, he may have an action in tort for deceit
or negligence respectively. A misrepresentation is fraudulent where the
representor knows that his statement is false, or has no belief in its truth,
or makes it recklessly, not caring whether it is true or false. 3 A negligent
misrepresentation is one which is made without reasonable ground for
believing it to be true and in breach of a duty of care owed to the representee. After some initial doubts, 4 it is now accepted that the required
"special relationship" which gives rise to a duty of care at common law
may subsist between parties negotiating a contract. 5
In addition, where the representation is made by or on behalf of the
party with whom the contract is made and the representation can be
classified as a term of the contract (or a term of a collateral contract),
the representee may recover damages from the other party for breach of
contract. The accepted test for determining whether a pre-contract representation is a term of the contract is the intention of the parties. Here, as
in other branches of the law of contract, the courts use an objective standard. The question to be determined is whether a reasonable person placed
in the situation of the parties would infer that a warranty was intended. 6
It has been noticeable in recent years that the courts have generally been
more willing to accept that pre-contract representations are contractually
binding. 7 Technical obstacles which might formerly have prevented such
conclusions appear no longer to cause difficulty. Thus, the parol evidence
rule, which prohibits the addition of oral terms to written contracts, is often
ignored altogether or side-stepped on the ground that the statement is a
term of a partly written and partly oral contract or a collateral contract. 8
Of course, the damages recoverable under the above causes of action
are not necessarily the same. Where the statement is contractually binding, the representee recovers the contract measure of damages. For fraud
3 Derry v Peek (1889) 14 App Cas 337.
4 See generally McLauchlan, "Pre-Contract Negligent Misrepresentation" (1977) 4 Otago
LR 23.
5 See eg Esso Petroleum Co Ltd v Mardon [1976] QB 801, Capital Motors Ltd v Beecham
[1975] 1 NZLR 576, Coleman v Myers [1977] 2 NZLR 225, and Halliday v Johnson
[1985] 2 NZLR 563.
6 Hospital Products Ltd v· United States Surgical Corporation (1984) 58 ALJR 587 at
593, Oscar Chess Ltd v Williams [1957] 1 WLR 370 at 375.
7 See Ellul and Ellul v Oakes (1972) 3 SASR 377, Sealand of the Pacific v Robert C
McHaffie Ltd (1975) 51 DLR (3d) 702, Esso Petroleum Co Ltd v Mardon, supra, Sodd
Corporation v Tessis (1977) 79 DLR (3d) 632, to name just a few of the many relevant
Commonwealth authorities.
8 The trend of modern cases supports the view that a claim for breach of an oral warranty
will usually be upheld where there is an actionable misrepresentation, ie a clear misstatement of fact is made which induces the contract. Under the guise of the test of
intention, the real question which the courts have been asking themselves is - is it
reasonable to regard the representor as having accepted responsibility for the accuracy
of his statement? In the absence of special circumstances; where there is a statement
of fact on a matter within the representor's knowledge which induces the contract, the
natural answer to this question is yes. The representor has taken it upon himself to make
the statement and therefore it is reasonable to infer that he has agreed to bear the consequences if the statement turns out to be false.
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and negligence the tort measure is applicable. As is well known, these
measures can sometimes lead to markedly different results.
2 Statutory causes of action for misrepresentation
(a) New Zealand
The common law has been substantially modified in New Zealand by
the Contractual Remedies Act 1979. Section 6(1) provides:
If a party to a contract has been induced to enter into it by a misrepresentation, whether
innocent or fraudulent, made to him by or on behalf of another party to that contract (a) He shall be entitled to damages from that other party in the same manner and
to the same extent as if the representation were a term of the contract that has
been broken; and
(b) He shall not, in the case of a fraudulent misrepresentation, or of an innocent misrepresentation made negligently, be entitled to damages from that other party for
deceit or negligence in respect of that misrepresentation.
The principal effects ofthis section are as follows. First, a contracting party
who seeks to recover damages from the other party in respect of a
misrepresentation which induced entry into the contract is no longerrequired to establish fraud, negligence, breach of warranty or breach of
a collateral contract. Damages are recoverable for a purely innocent misrepresentation. Secondly, since the damages are to be assessed as if the
representation were a broken term of the contract, the contract measure
is obviously applicable. Thirdly, the statutory remedy supersedes the tort
remedies for negligent and fraudulent misrepresentation.
It is important to emphasise, however, that the section has no application
where the person making the misrepresentation is not a party to the contract entered into by the representee nor an agent of a party. In such cases
the potential tort liability of the representor remains. Furthermore, it is
only the contracting party responsible for the misrepresentation who is
liable to pay damages in accordance with the contract measure and who
cannot be sued in tort. The personal tort liability of an agent is unaffected. 9
Thus, the real estate agent continues to be liable for fraudulent or negligent
misrepresentation. to
It follows that, despite the passing of the Contractual Remedies Act,
the distinction between the contract and tort measures of damages for misrepresentation remains of considerable practical importance. Nevertheless,
the potential operation of the Act must continually be borne in mind
throughout this article. Many of the cases discussed involve tort actions'
for misrepresentation between contracting parties which can no longer be
brought in New Zealand. The representee must sue under the Act and seek
the contract measure and, as we shall see, this mayor may not be to the
representee's advantage. The pre-Act cases do, of course, remain good
authority for actions where the defendant is not a party to the contract
induced by the misrepresentation.
9 See further Dawson and McLauchlan, The Contractual Remedies Act 1979 (1981) at
23-24.
10 As in eg Richardson v Norris Smith Real Estate Ltd [1977] 1 NZLR 152.
Damages for Misrepresentations
373
The distinction between the contract and tort measures may be significant in other contexts as well. Thus, under section 43 of the Fair Trading
Act 1986 the courts have a discretion to award compensation for "loss or
damage" suffered by, inter alia, misrepresentation in contravention of
sections 12 and 13 of the Act. This provision is modelled on Australian
legislationll pursuant to which the courts have held that the appropriate
measure is more akin to that in tort than that in contract. 12
(b) United Kingdom
In the United Kingdom the representee may also have a statutory cause
of action under section 2(1) of the Misrepresentation Act 1967 which
provides:
Where a person has entered into a contract after a misrepresentation has been made
to him by another party thereto and as a result thereof he has suffered loss, then,
if the person making the misrepresentation would be liable to damages in respect thereof
had the misrepresentation been made fraudulently, that person shall be so liable notwithstanding that the representation was not made fraudulently, unless he proves that
he had reasonable ground to believe and did believe up to the time the contract was
made that the facts represented· were true.
This provision, which will be mentioned on a few occasions in the course
of this article, differs significantly from section 6 of the Contractual
Remedies Act 1979. First, the representor can escape liability by proving
that he had reasonable ground for his statement. Section 6 gives no such
defence. 13 Secondly, it seems that the measure of damages under section
2(1) is the tort measure. 14 Thirdly, section 2(1) does not abolish the actions
for pre-contract fraudulent and negligent misrepresentation.
3 The "Contract" measure
The fundamental purpose of damages for breach of civil obligations isIS
to put the party whose rights have been violated in the same position, so far as money
can do so, as if his rights had been observed.
11 Trade Practices Act 1974(Cth) s 87. A provision giving a statutory right to damages,
identical to s 82 of the Australian Act, was struck out of the Fair lfading Bill after
the hearing of submissions by the Commerce and Marketing Committee.
12 See Gates v City Mutual Life Assurance Society Ltd (1982) 68 FLR 74 at 91-92, (1983)
68 FLRI0l at 104 ("... the question is not how much better off [the representee] would
have been if the statements had been true but how much worse off he is by reason of
having taken the steps which he did in reliance on the statements"). See also Frith v
Gold Coast Mineral Springs Pty Ltd (1983) 65 FLR 213 at 226-233, Yorke v Ross Lucas
Pty Ltd (1982) 69 FLR 116, and Mister Figgins Pty Ltd v Centrepoint Freeholds Pty
Ltd (1981) 36 ALR 23.
13 Unless, of course, the fact represented is that there are reasonable grounds for, say, a
statement of opinion. See infra.
14 See McGregor, supra n 2 at paras 1482-1489 and Thylor, "Expectation, Reliance and
Misrepresentation" (1982) 45 MLR 139.
15 Victoria Laundry (Windsor) Ltd v Newman Industries Ltd [1949] 2 KB 528 at 539 per
Asquith LJ. See generally McGregor, supra n 2 at para 10.
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Applied to actions for breach of contract, where "the wrong consists not
in the making but in the breaking of the contract",16 the general rule
becomes - the plaintiff is entitled to be put in the position he would have
been in if the contract had been performed. 17 He is to be compensated
for the loss of his bargain, his lost expectation. In the case of a misrepresentation which is held to constitute a breach of contract, prima facie the
measure of damages is the difference between the value of what the representee received and what he would have received if the representation had
been true.
4
The "Tort" measure
The object of tort damages, on the other hand, is restitutio in integrum,
because "the plaintiff is not complaining of failure to implement a promise
but of failure to leave him alone".18 The plaintiff is entitled to be put in
the position in which he would have been if the tort had not been committed and, in the case of a tortious misrepresentation inducing a contract, this is usually taken to be the position he would have been in if the
contract had not been entered into. Generally speaking, therefore, the plaintiff recovers the difference between the value of what he received and the
amount he has outlaid - his positive losses. In tort, the relevant question
is "what loss flows from the entry into the contract induced by the misrepresentation?" whereas in contract it is "what loss flows from the lack
of truth of the representation treated as a term of the concluded contract?"
The basic distinction is that in contract the plaintiff is entitled to the benefit
of his bargain, whereas in tort he recovers his out-of-pocket loss.
Since most of the early cases involved misrepresentation inducing the
plaintiff to purchase property (usually shares) either from the defendant
or a third party, it was commonly stated that the normal measure of
damages for tortious misrepresentation is "price paid minus value received
at the time of the contract". However, it is now accepted that, since the
object of tort damages is to compensate the plaintiff for the net loss
resulting from his reliance on the defendant's representation, "consequential" losses are also recoverable in appropriate cases (subject to the rules
relating to causation, remoteness and mitigation of damage). 19
Although at one time some doubt as to the position in England appears
to have been entertained,20 the distinction between the contract and tort
measures must now be taken to be firmly entrenched in the common law.
16 McGregor, supra n 2 at para 573.
17 See Robinson v Harman (1848) 1 Ex 850 at 855; Wertheim v Chicoutimi Pulp Co [1911]
AC 301 at 307; British Westinghouse Electric and Manufacturing Co Ltd v Underground
Electric Railways Co of London Ltd [1912] AC 673 at 689; Monarch Steamship Co
Ltd v Karlshamns O/jefabriker (A/B) [1949] AC 196 at 220; Koufos v Czarnikow Ltd
[1969] 1 AC 350 at 400, 414 and 420; Inder Lynch Devoy & Co v Subritsky [1979] 1
NZLR 87 at 95; and other authorities cited in McGregor, supra n 2, para 10.
18 McGregor, supra n 2 at para 573.
19 See eg Doyle v Olby (Ironmongers) Ltd [1969] 2 QB 158, Gould v Vaggelas (1984) 58
ALJR 560, and McGregor, supra n 2, paras 1472-1474.
20 See McGregor on Damages (13th ed 1972) paras 1359 and 1459.
Damages for Misrepresentations
375
It is established by a long line of English,21 New Zealand,22 Australian, 23
and Canadian24 decisions.
The position in the United States of America, however, is quite different. 25
A majority of jurisdictions apply the "benefit of bargain" measure where
a plaintiff is induced by the defendant's fraudulent misrepresentation to
enter into a contract with the defendant. Some jurisdictions have gone further and allow the plaintiff the option of claiming the benefit of his bargain
or his out-of-pocket loss and this is the position adopted in the Restatement (Second) of Torts. 26 However, the out-of-pocket measure applies where
the misrepresentation is merely negligent and also where the plaintiff suffers
his loss not through entering into a contract with the defendant but in dealing with a third person.
5
Some consequences of the distinction
Whether application of the contract or tort measure will be more satisfactory from the representee's point of view (in the sense of yielding a
greater recovery) depends on the nature of the representation and the other
circumstances of the case. It is dangerous to generalise but it is perhaps
fair to say that the contract measure, since it seeks to give the representee
the benefit of his "bargain", will in the majority of cases lead to a larger
award than the tort measure. Nevertheless, it needs to be borne in mind
that a significant number of cases can arise where application of the contract measure will result in recovery of a sum which is the same as, or even
less than, that recoverable in tort.
The representee will recover more in contract than tort in cases where,
had the representation been true, his assets would have been increased or
21 See McConnel v Wright [1903] 1 Ch 546; Doyle v Olby (Ironmongers) Ltd supra, and
the numerous other authorities establishing the application of the tort measure in actions
for deceit cited in McGregor, supra n 2 at paras 1460-1465.
22 Canavan v Wright [1957] NZLR 790; Scott v New Zealand Refrigerating Co Ltd [1969]
NZLR 30; Foster v Public Trustee [1975] 1 NZLR 26.
23 Holmes v Jones (1907) 4 CLR 1692; Toteff v Antonas (1952) 87 CLR 647.
24 Steele v Pritchard (1907) 7 WLR 108; Rosen v Lindsay (1907) 7 WLR 115; Hepting
v Schaaf (1963) 43 DLR (2d) 168; Parna v G & S Properties Ltd (1969) 5 DLR (3d)
315; Bango v Holt (1971) 21 DLR (3d) 66; West Coast Finance Ltd and Booth v Gunderson, Stokes, Walton & Co [1974] 2 WWR 428; Uncle Ben's Tartan Holdings Ltd v Northwest Sports Enterprises [1974] 4 WWR 69. See also the numerous other authorities
noted by Waddams, supra n 2 at para 582.
25 See generally McCormick, Handbook on the Law ofDamages (1935) 448-454; Prosser
and Keeton, The Law of Torts (5th ed 1984) 765-770; Dobbs, Handbook on the Law
ofRemedies (1973) 594-598; Barnett, "Deceit Damages in California: Old Problem New Departure?" (1974) 14 Santa Clara Lawyer 325, 328-338.
26 (1977). Section 549 provides:
"(1) The recipient of a fraudulent misrepresentation is entitled to recover as damages
in an action of deceit against the maker the pecuniary loss to him of which the
misrepresentation is a legal cause, including
(a) the difference between the value of what he has received in the transaction and
its purchase price or other value given for it; and
(b) pecuniary loss suffered otherwise as a consequence of the recipient's reliance
upon the misrepresentation.
(2) The recipient of a fraudulent misrepresentation in a business transaction is also
entitled to recover additional damages sufficient to give him the benefit of his contract with the maker, if these damages are proved with reasonable certainty."
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Otago Law Review
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his situation otherwise improved. The contract measure enables a representee, whether or not he has suffered a loss in his pre-contract net wealth,
to be put in the position he would have been in if the representation had
been true and thus to obtain the expected benefit.
Illustrations
1 P is induced to buy D's house by a misrepresentation that it is "on main
sewerage". P seeks damages of $550 being the cost of connecting the house to
the sewer. P succeeds in contract even if the house unsewered is worth more
than he paid for it. 27
2 P wishes to raise the level of his· sea-life display vessel. D advises that he has a
lightweight concrete with a dry density of 30 Ibs per cubic foot which,
therefore, can do the job. P orders the concrete and the work is carried out.
The concrete turns out to be much heavier than represented with the result
that the vessel sinks even deeper into the water. In contract, P recovers not just
the cost of restoring the vessel to its earlier state (the "tort" damages), but the
added cost of raising the level. He is entitled to his lost expectation. 28
3 D, seeking to sell land to P, tells P that half of the land is covered with good
pine timber. P buys the land for $30,000. There is no timber on the land but it
is still worth $30,000. The evidence establishes that, if the representation had
been true, the land would have been worth $40,000. P may recover damages of
$10,000 under the contract measure. 29
In some cases, however, it will not matter which measure is applied. The
amount required to restore the status quo ante may be the same as the
amount required. to put the plaintiff in the position he would have been
in if the contract had been performed - either because performance of
the contract would not have improved the plaintiffs resources or would
at least have ensured retention of the status quo.
Illustrations
1 P is induced to buy a car for $10,000 by D's representation that the car is a
1983 model. In fact, the car is a 1982 model having a market value of $9,500.
If the representation had been true, the value of the car would have been
$10,000 - the amount paid for it. In contract, P recovers $500, which is the
same as his out-of-pocket loss.
2 P, a nursery firm, purchases a new brand of weedkiller relying on D's representation that, like the brand P has been using, no harmful residue will be left in
the soil within a certain period following its application. The representation is
false and subsequently causes the destruction of P's stock and consequent loss
of profits. Subject to the question of remoteness of damage, P will recover the
same damages in tort and contract. Precisely the same losses would have been
averted (a) if the representation had been true or (b) if the misrepresentation
had not been made and the weedkiller not purchased. 30
27 See Ellul and Ellul v Oakes (1972) 3 SASR 377.
28 See Sealand of the Pacific v Robert C McHaffie Ltd (1975) 51 DLR (3d) 702. See also
Snarski v Barbarich [1969] WAR 46 where there was a fraudulent misrepresentation
by the vendor of a farm property that the water supply was adequate for the purpose
of conducting the business. The purchaser's claim for loss of profits due to the lack
of water was rejected.
29 A similar illustration is given in the Restatement (Second) of Torts (1977), Comment
(i) to s 549. If the value of the land bought were not $30,000 but $25,000, P could prima
facie recover $5,000 under the tort measure and $15,000 under the contract measure.
30 Cf the difficult case of Fillmore's Valley Nurseries Ltd v North American Cyanamid
Ltd (1958) 14 DLR (2d) 297.
Damages for Misrepresentations
377
The representee may also recover the same amount in contract and tort
in situations where, because the position he would have been in if the
representation had been true is too uncertain or because of the qualified
nature of the representation, the court can only grant damages designed
to effect restitutio in integrum. 31
Illustration
P enters into a lease of a new petrol station relying on D's statement - "We
estimate that the throughput of the station in its third year of operation will
amount to 200,000 gallons." The circumstances are such that this statement
carries the implied representation that the forecast is based on reasonable
grounds. That representation is false. Further, only about half of the estimated
throughput is achieved. P cannot recover damages in contract for the loss of
the profit that he would have made on a turnover of 200,000 gallons. The
actionable statement is not that the throughput would be achieved, but that
the· estimate was based on reasonable grounds. It does not follow that if D did
have reasonable grounds 200,000 gallons would have been sold. The estimate
might have been well founded but still wrong. 32
The representee will recover less in contract than in tort where he is
induced to enter into what is a losing contract irrespective of the
misrepresentation.
Illustration
P purchases goods for $5,000 in reliance on D's fraudulent misrepresentation
as to their quality. The goods are worth $4,000. However, even if the representation had been true, their market value would still have been $4,500 only. In
pripciple, P recovers in cQntract $500 - the amount required to put him in the
position he would have been in if the representation had been true. 33 In a tort
action for deceit, he recovers $1,000 - the amount required to restore his precontract financial position. 34
It is not only in "losing bargain" cases that application of the tort measure
is more satisfactory from the representee's point of view. Often the essence
of the representee's complaint is not that misrepresentation results in his
bargain being less valuable than it would have been if the representation
had been true but that he has suffered loss through entry into the contract
induced by the misrepresentation. In other words, he is saying "your false
statement induced me to act in a way that I would not otherwise have acted
l
31 See Dawson and McLauchlan, supra n 9 at 29 and New Zealand Motor Bodies Ltd
v Emslie [1985] 2 NZLR 569 at 596.
32 This illustration is, of course, identical to the well-known case of Esso Petroleum Co
Ltd v Mardon [1976] QB 801 where P's damages were limited to the losses resulting
from his entry into the contract. It is arguable that, in so far as damages are awarded
for breach of contract in this situation, they should be abated to take into account the
chance that, if the representation had been true (ie D did have reasonable grounds for
his estimate), P might still have suffered the losses.
33 Quaere, however, whether the victim of fraudulent misrepresentation might be entitled
to an award of exemplary damages where his action is for breach of contract? See
McGregor, supra n 2 at para 323.
34 But cf Wehr v Thom [1969] WAR 39 where the court refused to award damages based
on the difference between price paid and actual value in a 'bad bargain' situation. Instead,
the contract measure was applied. The decision must be regarded as wrong on both
counts.
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Otago Law Review
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(entry into the contract) and my reliance on you has cost me". In such
cases, a "benefit of the bargain" analysis may be completely unworkable
or lead to unacceptable results. The following illustration, modelled on
an example given in the Restatement (Second) of Torts,35 highlights the
difficulties.
The owner of a valuable piece of china is induced to sell it for $10 by a representation
that it has certain defects which make it practically worthless. If the damages are assessed
by comparing the representee's actual position with the position he would have been
in if the representation had been true, the result is that he suffers no loss. He would
have sold worthless property for a substantial price. 36
Similar problems in attempting to apply a benefit of the bargain analysis
may arise where the representation concerns a "collateral" matter - ie
a matter which does not relate to the condition or value of the subject
matter of the contract or the benefit/burden of the contract - for example,
a representation by a purchaser of shares that "A is no longer interested
in buying them from you for a certain (higher) price", and a representation by a seller that "A (a reputable person known to the purchaser) is
investing $X in the company". 37
The limits of tort damages
While the distinction between contract and tort damages for misrepresentation is easy to state in general terms and readily comprehensible, its
application is not always nearly so straightforward. Indeed, an examination of the authorities reveals that in certain areas there is a great deal of
confusion and inconsistency in the application of the competing measures.
In some tort actions, plaintiffs have recovered what appear to be damages
for loss of bargain. In others, damages have been wrongly denied or limited
on the ground that the plaintiff was .seeking to recover for his loss of
bargain. The distinction between recovery in tort and recovery in contract
has been both understated and overstated.
As we shall see, much of the difficulty stems from the failure on the
part of the courts to address adequately a number of crucial issues. In
tort, for example, it is accepted that the representee is entitled to compensation for "damage suffered" or "loss sustained" through reliance on the
negligent or fraudulent statement. But, what precisely is the meaning of
"damage" in this context? What is involved in restoring a plaintiff to his
"pre-tort position"? To the extent that the formula of "price paid minus
value" is the usual or prima facie means of expressing this objective, how
is "value" to be determined? To what extent are plaintiffs free to choose
alternative measures of damage? It is accepted that "consequential" losses
are also recoverable, but does this extend to losses other than out-of-pocket
expenses, for example loss of the opportunity to enter into other contracts?
6
35 Comment (g) to s 549.
36 Cf for a similar situation Gray v Trick 220 NW 741 (1928) where damages for fraudulent
misrepresentation were awarded on the basis of the difference between actual value of
the property and the price received. See also Erde v Fenster 141 NY Supp 943 (1913),
noted (not altogether accurately) in 55 Harv LR 1023.
37 Cf Potts v Miller (1940) 64 CLR 282.
Damages for Misrepresentations
II
379
ApPLICATION IN PRACTICE OF THE PRICE PAID MINUS VALUE RULE
A good illustration of the inconsistency in the authorities is provided
by the quite different analyses which the various Commonwealth courts
would accord to the following simple situation:
P is induced to buy farm land by D's misrepresentation that the land includes an
operating water well. P brings an action in tort claiming damages of $5,000. It is
admitted that this sum represents either the cost of remedying the misrepresentation
or the difference between the price paid and the value of the property if it had been
as represented.
One would think that P cannot succeed in his action unless he proves in
addition that the price paid for the land exceeded its actual value by the
amount claimed. It is not sufficient for P to prove that the property was
not worth as much as it would have been worth if the representation had
been true for this is to award damages for loss of bargain.
In Ellul and Ellul v Oakes, 38 which concerned a misrepresentation that
a house was "on main sewerage", the Supreme Court of South Australia
dismissed the plaintiffs' action for negligent misrepresentation on this
ground. 39 Bray CJ held that the plaintiffs' claim 40
must fail because it is based on tort and damage is the gist of the action and no damage
was shown. The measure of damages applicable to a claim for negligent misrepresentation certainly cannot be greater than in a claim for damages for fraudulent misrepresentation and it is well settled that in the latter case it is the difference between
the value of what the plaintiff parted with and the value of what he got in consequence of relying on the representation. It is not the contractual standard of the difference between the value of what he got and the value of what he would have got
if the representation had been true. There is no evidence that the property unsewered
and with the septic tank was worth less than [the price paid]. There was, indeed,
evidence, which was hardly needed, that an unsewered property is less valuable than
the same property sewered, but there was no evidence as to the value of this property
in its unsewered state ....
Zelling J41 and Wells J42 took a similar view.
Ample support for this approach is to be found in other, more
authoritative, decisions of the New Zealand and Australian courts. Thus,
in Canavan v Wright, 43 the purchaser of a farm property claimed damages
for fraudulent misrepresentation by the vendor as to the carrying capacity
of the land. It was held by the New Zealand Court of Appeal, inter alia,
that, as there was no evidence from which the value of the land at the time
of the sale could be determined, the plaintiff had failed to prove his cause
38 Supra n 27.
39 The plaintiffs did, however, recover damages for breach of warranty amounting to $550,
being the cost of connecting the house to the sewer.
40 Supra n 27 at 379.
41 Ibid at 389-390.
42 Ibid at 393.
43 Supra n 22.
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Otago Law Review
(1987) Vol 6 No 3
of action and no damages could be awarded in respect of the land. 44 Two
recent decisions of the New Zealand Court of Appeal and the High Court
of Australia are to a similar effect. 45 In both, the plaintiff failed on the
ground that there was insufficient evidence that price paid exceeded value.
It was emphasised that, while it was not necessary for a plaintiff to prove
his loss with final precision, it must be proved with some degree of certainty. The onus was on the plaintiff to adduce sufficient evidence to enable
the calculation to be made as a matter of clear inference from proved facts.
There are, however, a significant number of cases in which plaintiffs have
recovered damages for tortious misrepresentation without proof on their
part that price paid exceeded value. Thus, in Van den Esschert v Chappell 46
a vendor fraudulently misrepresented that there were no white ants in the
house. In the Supreme Court of Western Australia the purchaser recovered
damages in respect of the cost of their eradication. Jackson SPJ stated: 47
. . . the price paid as between the vendor and purchaser who are freely negotiating
but arguing is prima facie evidence of the value of this dwelling-house free of white
,ants. If it is not free of white ants but is infested then, I think, it can be readily inferred
that its value must be less than otherwise .... The extent of depreciation, the value
may well be the subject of evidence from experts, but it cannot be in any sense less
than the cost of the eradication of the white ants. Hence in this case, although the
Court cannot say affirmatively what the total damage is that the plaintiff has suffered,
it is clear on the evidence that she has suffered at least, in my view, the cost of eradication
In other'words, his Honour was prepared to assume that price paid equalled
the value of the house as represented. From here it was but a short step
to conclude that price paid exceeded actual value.
Although not adverted to in Chappell, strong support for this approach
is to be found in the leading case on the measure of damages for deceit,
McConnel v Wright. 48 There Collins MR, in an often cited passage, said
of the deceit action: 49
is not an action for breach of contract, and, therefore, no damages in respect of
prospective gains which the person contracting was entitled by his contract to expect
come in, but it is an action of tort - it is an action for a wrong done whereby the
plaintiff was tricked out of certain money in his pocket; and therefore, prima facie,
the highest limit of his damages is the whole extent of his loss, and that loss is measured
by the money which was in his pocket and is now in the pocket of the company. That
is the ultimate, final, highest standard of his loss.
11
44 The plaintiff did, however, recover in respect of certain consequential losses. See also
the leading Australian case of Holmes v Jones (1907) 4 CLR 1692 at 1702-1704 (Griffiths
CJ), 1708-1709 (O'Connor J), and 1715-1717 (Isaacs J) where it was "perfectly consistent
with the evidence given by the plaintiffs that they have suffered no loss, or even that
they have made a good bargain" (1717).
45 See Newark Engineering (NZ) Ltd v Jenkin [1980] 1 NZLR 504 and Ted Brown Quarries
Pty Ltd v General Quarries (GUston) Pty Ltd (1977) 16 ALR 23.
46
47
48
49
[1960] WAR 114.
Ibid at 117.
Supra n 21.
Ibid at 554-555.
Damages for Misrepresentations
381
His Lordship continued (in a less well known passage):50
But, in so far as he has got an equivalent for that money, that loss is diminished;
and I think, in assessing the damages, prima facie the assets as represented are taken
to be an equivalent and no more for the money which was paid. So far as the assets
are an equivalent, he is not damaged; so far as they fall short of being an equivalent,
in that proportion he is damaged.
Romer LJ stated: 51
I apprehend that when in a case like this application is made for shares in a company
on a representation stating what advantages that company has, in the absence of
evidence to the contrary, it should be taken that the price paid for the shares was
equivalent to the value of the shares in the company having the advantages stated
in the prospectus.
Cozens HardyLJ stated: 52
As a rule of convenience, and indeed almost of necessity, the property which would
have been acquired by the company, if all the statements in the prospectus had been
correct, must prima facie be taken to be worth the precise sum paid for the property,
neither more nor less. This is the prima facie presumption, and it is sufficient for
the decision of the present case, for no evidence has been adduced by the defendant
to rebut the presumption.
It is interesting that, while this presumption has generally been ignored
in Australia and New Zealand, 53. it has been consistently applied by the
Canadian courts. In Hepting v Schaaj54 the plaintiffs were induced to buy
a house from the defendants for $17,700 by a fraudulent misrepresentation that it contained a legally rentable suite. It was held by the Supreme
Court of Canada that the plaintiffs were entitled to damages of $2,500
- the amount which the defendants had admitted was the difference
between the house with and the house without a legally rentable suite.
Although the court adopted and purported to apply the tort measure of
price paid minus value, it is clear that the actual result was that the plaintiffs recovered damages for their loss of bargain. They recovered precisely
the same amount that they would have recovered in an action for breach
of warranty. According to Spence J, citing McConnel v Wright, not only
was price paid presumed (in the absence of proof to the contrary·by the
defendants) to equal the value of the property as represented, but this also
justified the further presumption that any difference in value between the
50
51
52
53
Ibid at 555. Emphasis added.
Ibid at 556. Emphasis added.
Ibid at 559.
However, it was the subject of some discussion by the High Court of Australia in Potts
v Miller (1940) 64 CLR 282 at 299-300 (Dixon J) and 307-309 (Williams J). The presumption was held to be of no assistance because the representation in question had
"no relation to the value of the shares or the nature or quality of the assets or business
of the company" (Dixon J at 3(0). See also Field v Shoa/haven Transport Pty Ltd [1970]
3 NSWR 96 at 107-109, where the presumption is referred to as "the principle in Potts
.v Miller".
54 [1964] SCR 100; (1963) 43 DLR (2d) 168.
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property as represented and the actual property equalled the difference
between price paid and value. 55
A similar decision was reached 13 years later by Verchere J in the British
Columbia Supreme Court in Chua v Van Pelt. 56 The vendor of a market
gardening operation fraudulently misrepresented the heating capacity of
a boiler and the purchaser claimed as damages for deceit the difference
between the contract price and the fair market value of the premises without
the represented boiler capacity, "of which the estimated cost of installing
that additional capacity ... was the proper and only measure".57 After
accepting that in an action for deceit the plaintiff was only entitled to
recover the difference between price paid and value received, Verchere J
held that, in the absence of compelling evidence of actual value, "that value
would have to be arrived at indirectly".58 It was necessary "to determine
first, the value of the premises as represented, and second, the cost of
making that representation good; and then, by deducting the one from
the other, to arrive at the sought after figure".59 On the basis of McConnel
v Wright the value of the property if it had been as represented was presumptively the price paid. His Honour held that the presumption had not
been rebutted - somewhat surprisingly in view of his statement that the
purchaser "probably 'got a bargain' "60 - and, as a result, the damages
awarded were the difference between price paid and value, value represented
by the price paid minus the cost of completion, which of course equalled
the cost of completion. As in Hepting v Schaaf, the award was tantamount
to damages for loss of bargain. 61
The essential difference between these Canadian cases and the decisions
of the Australian and New Zealand courts noted earlier is that the latter
place the onus on the plaintiff to prove actual. damage. He must bring
evidence to establish that actual value received fell short of the price paid.
The cases proceed on the basis that, despite the misrepresentation which
renders the subject matter less valuable than it might have been otherwise,
the plaintiff may well have gained offsetting advantages from other parts
of the contract. As Isaacs J pointed out in Holmes v Jones,62 "it is perfectly consistent with the evidence given by the plaintiffs [that there was
misrepresentation which diminished the value of the property] that they
have suffered no loss, or even that they have made a good bargain".
In the Canadian courts, the lot of a plaintiff in an action for damages
for misrepresentation is considerably easier. They are prepared to presume
that damage - one of the essential elements of the torts of deceit and
55 It is to be noted that the headnote at 43 DLR (2d) 168 is wrong in so far as it states
that the onus was on the defendants to prove that the property had a "lesser value"
than the contract price.
56 (1977) 74 DLR (3d) 244.
57 Ibid at 250.
58 Ibid at 254.
59 Idem.
60 Idem.
61 In Chua, the purchase price was $95,000 and the court found that the cost of making
good the representation at the time of the purchase was $10,000. Damages were thus
calculated on the following basis: $95,000 - ($95,000-$10,000) =$10,000.
62 (1907) 4 CLR 1692 at 1717.
Damages for Misrepresentations
383
negligence - has been suffered. The McConnel v Wright presumption is
operated so that the court presumes not only that price paid equals the
anticipated value of the subject matter if it had been as represented but
also that real value equals price paid minus the deficiency in value (as in
Hepting v Schaaf) or the cost of completion (as in Chua v Van Pelt). The
onus is on the defendant to prove that real value exceeded the price paid
or that if the property had been as represented its value would have exceeded
the price paid.
It must, however, .be noted that, while sometimes producing the same
result as an action for breach of contract, application of the McConnel
v Wright presumption does not strictly represent an expectation theory of
recovery. If the defendant proves that the property would, if as represented,
have been worth more than was paid for it, damages will only be awarded
to the extent that t.b.e cost of completion is not offset by the excess of value
if as represented over. the price paid. 63 The same cannot be said of a test
that equates difference between price paid and value in fact with difference
between value as represented and value in fact or deficiency in value stemming from the matter misrepresented. Both look directly to expectations
and the latter does not even take account of compensating advantages.
While the McConnel v Wright presumption may enable the courts to
reach results which are practically just, it is to be doubted whether it is
justified in principle. Is price paid a good indicator of value, given that
we all look for bargains and often succeed in procuring them? More
importantly, it can be argued that the dicta in McConnel v Wright have
been taken out of context. The presumption was used as the basis for concluding that there was sufficient evidence that damage had been suffered,
not as the basis for measuring the quantum of damages. The basic question before the court was whether there ought to be an inquiry into damages
and that depended on whether there was sufficient prima facie evidence
of damage.
McConnel, and many of the other early cases which considered the law
relating to damages for misrepresentation, involved proceedings under
statutes imposing liability for misrepresentations in, or omissions from,
company prospectuses. 64 And, as Jordan CJ pointed out in Potts v Miller, 65
"difficulties are likely to be occasioned by some of the observations in
certain of [these] authorities" unless attention is paid to the trial procedure
adopted. Unlike the common law actions for deceit which were tried before
a jury thus requiring determination of the damages issues at the trial, the
cases arising under the statutes governing prospectuses were ordinarily tried
in the Chancery Division where the practice was to remit inquiries as to
63 Thus, suppose that in Chua, where the price paid was $95,000 and the cost of making
good the representation was $10,000, the defendant proved that the value of the subject
matter if as represented would have been $100,000. The damages awarded would have
been, not $10,000, but $5,000: $95,000 - ($100,000-$10,000) =$5,000. Cf, however, Thylor,
"Expectation, Reliance and Misrepresentation" (1982) 45 MLR 139 at 147.
64 Principally, s 38 of the Companies Act 1867 and s 3 of the Directors Liability Act 1890.
The leading authorities, apart from McConnel, are: Cackett v Keswick [1902] 2 Ch 456;
Broome v Speak [1903] 1 Ch 586 (affirmed sub nom Shepheard v Broome [1904] AC
342); and MacLeay v Tait [1906] AC 24.
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damages to the Master's office. "So long as the evidence suggested that
the plaintiff might have suffered damage, the question whether he had in
fact done so was remitted to the Master for determination ...."66 Accordingly, the question for the court in these cases was not whether the evidence
justified an award of damages, but whether it justified "an inquiry as to
whether any damage had in fact been sustained as the result of the fraud". 67
This "usual practice" was described by Lord Lindley in Shepheard v
Broome68 as "extremely convenient. It saves the trouble and expense of
going into evidence which will be useless if the plaintiff fails to establish
any liability of the defendant to him." This may well explain why Cozens
Hardy LJ in McConnel v Wright referred to his presumption as "a rule
of convenience, and indeed almost of necessity".69 It is not without
significance either that in the later case of MacLeay v Tait70 Lord Lindley
stated that McConnel "goes no further than" identifying what may be prima
facie evid~nce of damage to justify an inquiry into the amount of damages.
III PRICE PAID MINUS VALUE V DAMAGES FOR LOST OPPORTUNITIES
1 Introduction
In the examples considered so far, we have been concerned with what
is required of a plaintiff (P) who seeks to recover damages on the normal
tort measure of price paid minus value. Let us assume now that the evidence
establishes that the value received by P is greater than the price paid and
that, in this sense, he is better off as a result of his entry into the contract
induced by the misrepresentation. Does this necessarily mean that P cannot
recover damages in tort? What is the position if P proves that, but for
D's misrepresentation, he would have offered and D (or the other contracting party, as the case may be) would have accepted less than the price paid
or that he would have entered into a contract with a third party to acquire
similar property at a lower price?
Consider the following simple example. P buys a car for $5,000 relying
on D's representation that the car is a 1976 model. In fact it is a 1975 model
worth $5,200. If it had been a 1976 model, the car would have been worth
$5,400. Prima facie, the result is - P can recover damages of $200 in contract, but nothing in tort since, despite the misrepresentation, P has made
a good bargain. But what if P proves that she would have secured the car
for $4,800 if the misrepresentation had not been made, and she contends
that as a result of the tort she has "lost" $200? She argues that but for
D's tort she would have made a profit of $400, not merely $200, and that,
65
66
67
68
69
70
(1940) 40 SR (NSW) 351 at 357.
Ibid at 358.
Idem. See also Potts v Miller, supra n 37 at 307-308.
[1904] AC 342 at 348.
Supra n 21 at 559.
[1906] AC 24 at 31. See also Lord James in Shepheard v Broome, supra, who stated
(at 346) that "a prima facie cause of action being established, the plaintiff must be
afforded an opportunity by an inquiry of shewing whether he has sustained any damage.
I express no opinion whether the facts established at the hearing do or do not sustain
a claim for damages".
Damages for Misrepresentations
385
although on the surface she is better off, she has in a real sense suffered
a loss.
The issue is squarely raised, though not resolved, by the decision of the
New Zealand Court of Appeal in Scott Group Ltd v McFarlane. 71
2
The Scott Group Case
The material facts for present purposes were as follows. The plaintiff,
Scott Group Ltd, completed a takeover of John" Duthie Holdings Ltd
(Duthie). In formulating its takeover offer Scott Group relied, inter alia,
on the consolidated group accounts of Duthie which were audited by the
defendants, a firm of chartered accountants. The accounts showed that
the Duthie shares had a sound asset backing but a relatively poor income
record. Scott Group hoped that the takeover would strengthen its capital
structure and, to a lesser extent, improve profitability and eliminate competition. The takeover involved a two for one share offer; two shares in
Scott Group were offered in exchange for one share in Duthie. Shortly after
completion of the takeover, it was discovered that the accounts of Duthie
overstated the shareholders' funds by $38,000. Scott Group claimed this
sum by way of damages in an action against the defendants for negligence
in their audit of the consolidated accounts. It was alleged that, as a result
of this negligence, Scott Group had been induced to offer and pay $38,000
more than the actual value of the Duthie shares. The defendants admitted
that they should have detected the error in the accounts but denied liability.
At first instance,72 Quilliam J held that the defendants did not owe a
duty of care to Scott Group. His Honour then proceeded, in case his
decision was wrong, to consider whether there was proof of loss resulting
from the defendants' negligence. In his view the loss was not necessarily
the amount of the overstatement of the shareholders' funds ($38,000), but
rather the difference it made to the price paid for the Duthie· shares. In
other words, the plaintiffs loss was the difference between the price actually
paid and the price that would have been paid if the true position had been
known. His Honour felt that there was insufficient evidence to enable him
to conclude what the difference in the eventual price would have been,
although he doubted "whether it would necessarily have been the equivalent
of $38,000".73 If it had been necessary he would have directed an inquiry
by an independent expert.
The plaintiff's appeal was dismissed by a majority of the Court of
Appeal. Richmond P found that the defendants did not owe a duty of
care. His Honour said nothing on the damages issue. Cooke J disagreed
with Richmond P on the duty issue, but he too dismissed the appeal on
the ground that the plaintiff had not suffered a loss. Woodhouse J (dissenting) held that a duty was owed and he would have awarded damages
of $24,500. Our present concern is solely with the opinions of Cooke and
Woodhouse J on the damages issue.
71 [1978] 1 NZLR 553, noted by Johnston in (1978) 8 NZULR 175.
72 [1975] 1 NZLR 582.
73 Ibid at 591.
386
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Although both judges agreed that the question to be decided was whether
the price paid for the shares was more than their real value in the takeover
situation at the time, their approaches to the measurement of value were
totally different. Woodhouse J stated: 74
Their [the shares1 stock exchange value was 85 cents, a figure much below their adjusted
asset backing of about $2.75. So that the open market value does not assist in any
direct way, although no doubt it is a consideration which would have a powerful
influence upon the mind of a shareholder when offered a price significantly higher
than 85 cents. I have mentioned that the assets backing of each share was regarded
on both sides as considerably higher than the value of the shares for the purposes
of a takeover bid so that figure too is not immediately relevant. Its significance is
further minimised by the fact that it was much more than the breakup value that could
have been obtained if the company had been put into liquidation or the assets sold
off and some sort of capital distribution made. So in the absence of "takeover" competition for the shares the assets backing was a decisive bargaining factor only for
the limited purpose of ensuring that any offer would need to equal at least the breakup
value. And the Scott Group Ltd takeover was negotiated in a situation where there
was a minimum of competition. There is a fleeting reference to one other group considered to have been interested in making a takeover offer for the John Duthie Holdings
Ltd's shares. But ift that interest was in fact translated into a firm offer it was not
taken beyond $1.85~ In the circumstances, although the breakup value can probably
be regarded as a base price for the shares, any assessment in excess of that figure must
depend for present purposes upon the agreement that would have been reached at
the time by John Duthie Holdings Ltd and Scott Group Ltd as willing vendor and
willing purchaser, in each case with proper knowledge In my opinion it is the theoretical
price that would have been acceptable to the very parties that alone will decide whether
Scott Group Ltd made a loss in respect of which it should be compensated in the
present action. If the price actually paid by Scott Group Ltd can be regarded as
exceeding that theoretical price then more was paid for the shares than their true
takeover value at the time; and that excess consideration is the measure of the damages
that should be paid. Otherwise I think the claim for damages must fail.
In other words, for Woodhouse J, since neither the open market value,
the adjusted asset backing value nor the breakup value were appropriate
in this case, value had to be measured by the theoretical price that the plaintiff would have paid had it known the truth. Before going on to ascertain
this amount based on his interpretation of the facts, his Honour provided
further justification for this statement of the damages principle. 75
I have mentioned earlier in this judgment that Scott Group Ltd made its offer because
it was attracted by what it regarded as under-employed assets possessed by John Duthie
Holdings Ltd. It hoped that better use could be made of them if the two businesses
were amalgamated within its own organisation. In the result the value of the net assets
it acquired exceeded by a substantial margin the value of the consideration it provided for all the shares in John Duthie Holdings Ltd. But that fact should not be
allowed to obscure the true nature of the transaction. In considering whether Scott
Group Ltd received value for price it is essential to keep in mind that the agreement
reached was for a sale and purchase not of assets but of shares in a company that
remained in business as an active commercial undertaking. I say that because the particular character of the transaction has a double consequence. On the one hand, Scott
Group Ltd is unable to claim that damages should be measured directly by the fact
that the asset backing for the shares it acquired turned out to be $38,000 less than
had been anticipated. In tort a representee cannot claim damages by reference to the
74 [1978] 1 NZLR 553 at 576-577.
75 Ibid at 577.
Damages for Misrepresentations
387
situation he would have been in if the misrepresentation had been true. Conversely
the auditors are unable to take refuge in the substantial asset backing of the shares
in order to show that Scott Group Ltd did well to purchase the shares. The damages
are not to be measured by considering the collateral implications of the bargain but
by the price paid for the shares less their actual value at the time.
Ultimately, after a lengthy discussion of the evidence, Woodhouse J felt
able to conclude that the parties would have agreed upon a price of 5 cents
less per share which, in terms of total consideration, amounted to damages
of $24,500.
Cooke J, on the other hand, held that the plaintiff was not entitled to
any damages on the basis that it was clear on the evidence presented that
the value of the shares to the plaintiff exceeded the price paid. In his
Honour's view,76 it was
essential to remember that we are in the sphere of damages for tort - that is to say,
reparation for harm done. It is not a case in contract, where the damages broadly
represent the benefit which the plaintiff was promised. In an action in tort for deceit
leading to a contract of purchase, the normal measure of damages is the difference
between the price paid and the fair value at the time of purchase .... Where the
contract has been induced by the negligence of a third party rather than by fraud,
I think that the same measure should prima facie apply.
Later, after specifically disagreeing with the test applied by Quilliam J (and
by the same token that applied by Woodhouse J), Cooke J continued: 77
Further as to the true test: the distinction between inducement and damages is crucial.
Suing in tort, the plaintiff must prove not only that it acted on the defendants' statement but that it sustained damage by so doing .... There is evidence that if aware
of the mistake the plaintiff would have offered less. I doubt whether there is any substantial evidence that the Duthie directors would have accepted or recommended
acceptance of less, but if that question were important I would concur in Quilliam
J's view that an inquiry into damages would have been appropriate .... But while
the question of a possible lower negotiated takeover offer, and the calculations in that
connection made by my brother Woodhouse, would have a bearing on inducement
or causation, I am not persuaded that they can be carried over into the field of damages
once inducement or causation is proved. In considering damages one has to start,
not before the sale, but immediately after it was completed. This is clearly brought
out by Cotton LJ in Peek v Derry (1887) 37 Ch D 541, 591-593, unaffected on that
'point by the decision of the House of Lords, Derry v Peek (1889) 14 App Cas 337.
In principle it must be so, because the tort measure is the plaintiffs loss, which cannot
be ascertained without taking into account the benefit that the transaction has in fact
brought him.
His Honour then proceeded to find on the facts that the benefit of the
transaction to the plaintiff exceeded the price paid. The plaintiff company
by its own admission had not suffered a loss - the results of the takeover
were eminently satisfactory in terms of the objective of strengthening capital
structure. It was simply a case of the profit not being as great as it would
have been if the aC~Qunts had been correct. The plaintiff made a very good
76 Ibid at 585.
77 Ibid at 586-587.
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bargain but one that was "fractionally less good"78 than it appeared at first
sight. In no sense could it be said that at the conclusion of the transaction
the plaintiff was "out of pocket".
The critical question to be considered therefore is whether, on the
assumption that the plaintiff would have paid less for the shares if the
misrepresentation had not been made, the excess of price paid ought to
have been recovered in tort either on the basis suggested by Woodhouse
J or on some other basis.
Woodhouse J attempted to justify his award of damages, based on the
difference between price paid and the price that would have been paid had
the misrepresentation not been made, as simply another way of expressing
the traditional test of price paid minus value. The writer does not wish
to consider at this stage whether his Honour was correct in tying value
to the amount that would have been paid,79 although as we shall see later
there is considerable support in the cases for this approach. 80 Let us assume
for the moment that Cooke J was correct and "value received" exceeded
price paid. Does it follow that damages cannot be recovered in a tort action?
Or is the plaintiff entitled to recover on the basis that he suffered a loss
to the extent of the difference between the price paid and the price that
would have been paid but for the misrepresentation? The answer depends
on whether one sees "price paid minus value" as the only appropriate
measure of damages in this situation.
In determining whether application of the "price paid minus value"
formula ought to be seen as providing the answer to the Scott Group
problem, it is necessary to return once again to some first principles of
damages law. It is axiomatic that the object of damages is to put the party
whose rights have been violated in the same position, so far as money can
do so, as if his rights had been observed. Therefore, in a tort action the
object is to put the plaintiff in the position he would have been in if the
tort had not been committed. This means that, subject to the rules governing certainty, remoteness and mitigation, the plaintiff is entitled to be compensated for all damage resulting from the defendant's wrongful conduct.
In so far as pecuniary loss is concerned, compensation may be awarded
not only for positive losses (the diminution in existing assets as a result
of expenses incurred, property damaged or other change in position) but
also consequential losses (losses of profits and earnings which would have
been received by the plaintiff, or which he would have had the opportunity
of obtaining, if the tort had not been committed).81 Of course, where the
evidence establishes merely the loss of the chance to earn a profit or to
78
79
80
81
Ibid at 589.
See generally Cane, "The Valuation of Shares in the Law of Tort" (1982) JBL 79.
See 6 Difference in price paid and lost opportunities infra.
See Ogus, The Law of Damages (1973) at 18.
Damages for Misrepresentations
389
avoid a loss then, under the rules relating to certainty, account must be
taken of the possibility that the chance would not have been realised. 82
There are many situations where, in order to restore the plaintiff to his
pre-tort position, damages must be awarded for gains prevented/
opportunities lost as a result of the tort. Thus, as McGregor points out: 83
Where the plaintifrs goods have been damaged he may be allowed damages for loss
of profits, or, where no specific loss of profits can be shown, he may be awarded
damages for general loss of use, or, in default of either of the preceding, an award
of interest may be given. Similarly, where goods have been destroyed, successful claims
have ranged from damages for loss of profits to awards of interest. Misappropriation
of goods also may give rise to awards of damages for loss of profits or for loss of
use, and again interest should be allowed in default of either.
Similarly, loss of earnings or profits may be recovered in actions involving
negligence causing personal injury or economic loss,84 false imprisonment,
malicious prosecution, inducement of breach of contract, passing off and
other economic torts.
Although sometimes lost sight of, the same general principles are
obviously applicable in a tort action involving misrepresentation. The
starting-point is that recovery is "based on the actual damage directly flowing from the [tortious] inducement".85 It is clear that, depending on the
circumstances, damage may include both positive and consequential losses
in the sense used above. Thus, as in the case of other torts, an assessment
of damages designed to restore the status quo may involve taking account
of opportunities for gain of which the plaintiff has been deprived because
of the tort.
It is convenient for the purposes of this article to isolate and consider
separately two situations where damages for lost opportunity may be sought
in an action for tortious misrepresentation. First, situations where the
plaintiffs alteration of position involves either (a) conduct other than entry
into a contract or (b) entry into a contract other than a contract of sale
and purchase. In these cases recovery on the basis of price paid minus value
is obviously out of the question. Secondly, situations where the plaintiff's
alteration of position does involve entry into a contract of sale and pur82 For a recent illustration, see Craig v East Coast Bays City Council [1986] 1 NZLR 99.
The defendant negligently authorised the erection of a house in such a position as to
impair the view from the plaintifrs house without giving the plaintiff the opportunity
to exercise his right to object. The value of the plaintifrs house was reduced by $6,750
as a result of the impairment of the view. In light of this, and taking into account the
chances of the plaintifrs objection being successful, it was held by the Court of Appeal
that damages for the loss of the right to object should be assessed at $5,000.
83 McGregor supra n 2, para 50. See also the decisions of the New Zealand Court of Appeal
concerning damages for loss of use of an income earning chattel in Greig v Tasman
Rental Cars Ltd [1982] 2 NZLR 171 and Newmans Coach Lines Ltd v Robertshawe
(1983) unreported, CA 122/82, 16 December 1983.
84 See eg Takaro Properties Ltd v Rowling [1986] 1 NZLR 22 where the plaintiff recovered
damages in respect of the lost opportunity to pursue a development project as a result
of the defendant's negligence.
85 Clark v Urquhart [1930] AC 28 at 68 per Lord Atkin. See also Cooke v Caldwell's Wines
Ltd (1925) 25 SR (NSW) 161 at 173, Toteffv Antonas (1952) 87 CLR 647 at 650 and
Gould v Vaggelas (1984) 58 ALJR 560 at 562-563.
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chase. Although in these cases price paid minus value can properly be
regarded as the normal measure, it is far from an inflexible rule and indeed sometimes an assessment in terms of this measure may not be feasible
at all.
3
Cases where misrepresentation does not lead to contract of sale
Where the plaintiffs action in reliance on misrepresentation involves conduct other than entry into a disadvantageous contract, it is clear that the
recoverable loss may consist of expenses incurred,86 parting with property
or forgoing opportunities for gain or to avoid loss. Thus, in Barley v
Walford,87 the defendant fraudulently misrepresented to the plaintiff, a
printer of silk goods, that a particular pattern was the subject of a registered
design. The plaintiff recovered damages, inter alia, in respect of loss of
profits by discontinuing his use of the design.
A somewhat unusual example of the same principle is provided by the
decision of the High Court of Australia in Commercial Banking Co of
Sydney Ltd v R H Brown & CO.88 The respondent firm had contracted to
sell goods to a dealer. Prior to delivery they heard rumours that the
dealer was in financial difficulties. However, upon receipt of the appellant's
representation that the dealer was creditworthy, the goods were duly
delivered. One month later a receiver of the dealer was appointed. The
company was "hopelessly insolvent" and, as a result, the respondents did
not receive payment. The appellant's misrepresentation was found to be
fraudulent. The respondents recovered damages based on the value of the
wool at the time of delivery. But for the misrepresentation the respondents
would have refused to deliver any wool except in return for cash or a proper
security. Such refusal may have been a breach of contract on their part,
but at worst this would have rendered them liable to pay nominal damages
- the value of the goods had fallen below the contract price - whereas
by acting on the misrepresentation they had lost the total value of the wool.
Although this case actually concerned recovery for positive losses or a
forgone opportunity to avoid loss, there can be no doubt that the
respondents would also have recovered if the facts involved the respondents,
in some foreseeable manner, forgoing an opportunity for gain in reliance
on the bank's fraudulent misrepresentation.
The same principles apply where the representee's alteration of position
does involve entry into a contract (either with the representor or a third
party). An interesting early recognition of the notion of lost opportunity
providing an acceptable measure of damages in such cases is provided by
Equitable Life Assurance Society of the United States v Bertie, 89 a decision
of the New Zealand Court of Appeal. The respondent took out an insurance
policy with the appellant which provided for payment of the sum insured
only on death. He was induced to sign the proposal by a fraudulent mis-
86
87
88
89
-
See eg Richardson v Silvester (1873) LR 9 QB 34.
(1846) 9 QB 197; 115 ER 1249.
(1972) 46 ALJR 297.
(1890) 8 NZLR 579. For a modern analogue, see Gates v City Mutual Life Assurance
Society Ltd (1986) 60 ALJR 239 (decided since the time of writing).
Damages for Misrepresentations
391
representation that it provided for an endowment policy, thus entitling him
in 20 years to payment of the sum insured and bonuses. Three years later
the respondent discovered that he had entered into a life policy. He elected
not to rescind the contract and brought an action claiming damages for
deceit. This action failed on the ground of lack of proof of damage the respondent had not proved that he was in a worse position than he
would have been in if the representation had not been made. The significant point for present purposes is that the court indicated that it would
have been prepared to award as damages the extra benefits of the policy
that the respondent thought he was getting from the appellant provided
that he had actually lost, through impaired health or some other cause,
the opportunity of obtaining that kind of policy at the same rates as were
previously available after making necessary adjustments for increased age
and so forth. In the absence of proof of such factors, the court held that
to award the extra benefits of the endowment policy would amount to an
expectation level of recovery which was not appropriate in a tort action.
A more recent example of the recognition of the notion of lost opportunity is to be found in the well-known decision of the English Court of
Appeal in Esso Petroleum Co Ltd v Mardon. 90 For the reason noted
earlier,91 Mardon could not recover in respect of the profits he would have
made if the estimated turnover of 200,000 gallons had been achieved, nevertheless it was held that his damages included not only his positive losses
(wasted capital and overdraft liabilities incurred) but also the earnings from
an alternative business that he had forgone during the disastrous tenancy. 92
Another recent example is McNally v Welltrade International. 93 The
plaintiff had entered into a contract for employment in Libya in reliance
upon the defendant's negligent misrepresentation as to the nature of the
work and his suitability for the job. After only two weeks his employment
was terminated. Upon his return to England the plaintiff was out of work
for some months and it was a further year before his earnings matched
what they were before joining the defendant. In an action for negligent
misrepresentation (both at common law and under section 2(1) of the
Misrepresentation Act 1967 94) the plaintiff recovered, in addition to travelling and other expenses, the amount of earnings he had lost by giving up
his previous employment. 95
Authority for the recovery of lost opportunity damages is also to be
found in two cases concerning liability of agents to their principals for
breach of duty involving misrepresentation. These cases are significant for
present purposes because the misconduct of the agents did not in the
circumstances entitle the principal to the expectation level of recovery and
90
91
92
93
94
95
[1976] QB 801.
See text to n 32.
Supra n 90 at 821.
[1978] IRLR 497.
See Introduction section 2 (b).
For a comparable earlier case, see Burrows v Rhodes [1899] 1 QB 816 (discussed by
McGregor, supra n 2 at para 1474 and Ogus, supra n 81 at 253). See also Archer vBrown
[1985] QB 401 at 426-427.
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damages had to be assessed in accordance with principles akin to those
applicable to tort actions for misrepresentation.
The first case is Salvesen & Co v Rederi Aktiebolaget Nordstjernan. 96
Shipowners employed an agent to find freight at a certain rate per ton for
one of their ships. The agent incorrectly reported that a charter had been
concluded. When the shipowners were informed of the true position, they
made no effort to find an equally advantageous charter. Instead, they used
the ship to fulfil an existing contract at a much lower freight rate. In an
action against the agent, the shipowners claimed as damages the difference
between the amount actually earned and the amount that would have been
earned under the contract which the agent said had been concluded.
However, it was held by the House of Lords that, although the agent
breached its duty in supplying the incorrect information, the appropriate
measure of damages "was the loss actually sustained by the principal in
consequence of the misrepresentation, and that it did not include the
anticipated profit which he might have made if the representation had been
true".97 In the result recovery was limited to expenses reasonably incurred
as a result of the misrepresentation. However, Lord Davey emphasised that
there was "no evidence that the [shipowners] lost any opportunity of
profitably employing their ship owing to their belief that a charter had
been arranged ...."98 It can be inferred that his Lordship would have
allowed damages if any such lost opportunity had been established. Lord
Robertson was more positive and suggested: 99
If, for example, acting on the faith of the alleged contract, the [shipowners] had incurred
expense, or if, misled into inaction, they had missed other chances for the ship, these
and the like would be heads of damage.
In the second case the plaintiff did recover damages for lost opportunity.
In Johnston v Braham & Campbell Ltd100 an actress was induced to enter
into a contract of employment by the misrepresentation of her agent as
to the takings of the hall at which she was to perform. Under the contract
she was entitled to receive 60 percent of the takings. In an action against
the agent for breach of duty, the actress recovered, in addition to her outof-pocket expenses, the sum of £20 for loss sustained "by reason of the
fact that she lost the opportunity of profitably employing her time" during
the period she was fulfilling her engagement. 101 This award, as the court
emphasised, was calculated on the basis of the plaintiffs regular earnings
and not on the basis of the profits she would have made if the representation had been true.
It should be observed, however, that, as in Salvesen, there was no evidence
before the court of specific lost opportunities. The plaintiff did not allege
that, as a result of the defendant's misrepresentation, she had turned down
96
97
98
99
100
101
[1905] AC 302.
Ibid at 311 per Lord Davey.
Idem.
Ibid at 312. Emphasis added.
[1916] 2 KB 529, afrd [1917] 1 KB 586.
[1916] 2 KB 529 at 537 per Sankey 1.
Damages for Misrepresentations
393
other equally lucrative contracts. It is clear that if there had been such
evidence the plaintiff would have been awarded an amount equivalent to
the profits she would have made if the representation had been true. Rowlatt
J stated: 102
If in the present case the plaintiff could have proved that she had refused other
employment by reason of the negligence of the defendants, I have no doubt she could
have recovered damages upon that ground.
However, in the absence of evidence that the plaintiff would have made
the profits represented elsewhere if the contract had not been entered into,
the court awarded her a sum designed to compensate her for "broadly the
value of her time taking it on an average".103 Her position was treated as 104
analogous to that of a workman, or professional man, or any person who earns his
living by labour. If he meets with an accident caused by negligence and sues for damages
he recovers what he would have made during the time he was laid up, not because
at the time it is ascertained in point of fact that he would have made that sum, but
because that time which was of value to him he has lost by negligence.
A similar approach to tort damages for misrepresentation has also found
favour with the Supreme Court of Canada in the recent case of V K Mason
Construction Ltd v Bank of Nova Scotia. 105 The plaintiff contractor agreed
to construct an office and shopping complex in reliance on a negligent
misrepresentation from the developer's bank, the defendant, that the project was adequately financed. The project collapsed after construction had
been substantially completed by the plaintiff and the developer was unable
to pay the balance of $1.058 million owing to the plaintiff. The trial judge
awarded tort damages of $898,000, representing the balance owing minus
the plaintiffs projected profit of $160,000. However, in the Supreme Court
of Canada it was held that the judge was wrong in subtracting profit from
the damages award. The court was entitled to assume that the plaintiff
would have found a profitable means of employing itself had it not been
induced to work on the particular project by the defendant's misrepresentation. The lost profit on that project was a reasonable estimate of what
the plaintiff would have been likely to make if it had decided to find other
work. "That is to say, the lost profit on this contract represents the lost
opportunity for profit on any contract."106 It was also held that the plaintiff was entitled to interest from the date of the completion of the contract. 107
102 Ibid at 535.
103 Ibid at 534 per Rowlatt 1. Presumably if the defendant had been able to prove that the
plaintiff would not have been able to secure any other engagements during the period
in question, no award (apart from expenses incurred) could have been justified.
104 Idem.
105 [1985] 1 SCR 271.
106 Ibid at 286. The court also observed: "If Mason had made an exceptional profit on
the ... project it might be disentitled to an award of the entire amount of that profit
in tort damages, but this would be so only because it was not reasonably foreseeable
that it would have made a similarly exceptional profit on some other contract."
107 Idem.
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In other words, to put Mason in the position it would have been in absent the
misrepresentation we must assume that it would have in hand at the time it completed
the project that amount of outlay and anticipated profit which it lost in completing
the project. It seems to me to be only reasonable to assume that it would have been
able to put that money to profitable use. Interest is the court's way of compensating
Mason for the loss of the opportunity to invest that money.
4 Cases where misrepresentation induces
contract of sale and purchase
The only distinction between this type of case and those discussed in
the previous section is that normally the essence of the plaintiff/
representee's complaint is that he has been wrongfully induced to part with
his property or money for a less than adequate return consideration. In
these circumstances the difference between price paid and value received
will, more often than not, satisfactorily reflect the plaintiffs loss.
Since the cases which most frequently come before the courts involve
misrepresentations inducing contracts of sale, it should not be surprising
that price paid minus value has come to be expressed as the standard
measure of recovery in tort. This measure was so often accepted and applied
in the early cases (most of which involved misrepresentation inducing the
purchase of shares) that it appeared to be a settled "rule" only to be departed
from in exceptional circumstances. Modern authorities confirm, however,
that price paid minus value is far from being an immutable principle. Rather
it represents a convenient standard for measuring damages in the absence
of other evidence. The governing principles are no different from those
identified in the previous section. The question in each case is the same
- what foreseeable damage did the plaintiff suffer as a result of the tortious
misrepresentation? What amount is required to effect restitutio in integrum?
Indeed, in some cases involving contracts of sale, the plaintiff will not
be complaining that he has parted with his property for an inadequate
consideration and, as a result, recovery on the basis of price paid minus
value will be out of the question or quite unrealistic. A good example is
provided by the controversial case of Watts v Spence. lOB This case is also
instructive for the broader purposes of this article since it provides a recent
example of the difficulties that can arise through failure to take into account
the flexibility of tort concepts relating to damages and, in particular, the
availability of lost opportunity recovery.
The material facts of Watts v Spence for present purposes were as follows.
The plaintiff entered into a contract to buy a house from the defendant
for £7,000. Graham J found that the defendant had represented to the plaintiff that he was the sole owner of the house and in a position to sell it.
In fact the house was jointly owned by the defendant and his wife who
refused to join in the sale. It was held that the plaintiff was entitled to
damages for loss of his bargain under section 2(1) of the Misrepresentation Act 1967 (UK), which the judge found was the difference between the
value of the house at the date of the contract and its value at the completion date.
108 [1976] Ch 165.
Damages for Misrepresentations
395
It has been convincingly argued by McGregor 109 that it is the tort, not
the contract, measure which is applicable under section 2(1) and that,
therefore, Watts v Spence was wrongly decided. 110 In addition, as both
McGregor and Treitel111 point out, the true contract measure was not in
fact applied in the case. That measure is the difference between the contract price and the value of the house at the date of completion. As Treitel
states: 112
Suppose a purchaser agrees to buy for £24,000 a house worth £27,000 at the time of
purchase and £36,000 at the time of completion. If the house is not conveyed, his
damages for loss of bargain should be £12,000; under the Watts v Spence formula,
they would be £9,000.
Accordingly Treitel concludes: 113
The actual method of assessment adopted in Watts v Spence is therefore hard to justify
on any principle.
In the writer's view, however, the really fundamental criticism that can
be levelled against Watts is the apparent failure to consider whether
application of tort principles as to assessment of damages would have
achieved the desired result of adequately compensating the plaintiff. 114
Clearly, the standard measure of price paid minus value was inapplicable.
No price was paid and no value was received. One must therefore return
to first principles and ask - what damage did the plaintiff suffer as a
result of altering his position in reliance on the misrepresentation?
The representation in question was that the defendant was entitled to
sell the house. This representation was false and, as a result, the sale could
not be completed. Clearly, if the representation had not been made, the
plaintiff would not have entered into the contract. Having committed
himself to buy from the defendant, the plaintiff lost the opportunity of
pursuing an alternative contract. If it is reasonable to assume that he would
have been able to secure another property for a similar price, 115 his loss
was prima facie the difference (if any) between that price and the amount
required to purchase a replacement at the time the misrepresentation was
discovered. On the further assumption that the price agreed to be paid
to the defendant was the equivalent of the market value, this is tantamount
to the actual award in Watts of the difference between value at the date
of the contract and value at the date for completion.
109 McGregor, supra n 2 at paras 1486-1489.
110 McGregor's arguments have since been accepted, and Watts v Spence not followed, by
Mervyn Davies J in Sharneyford Supplies Ltd v Edge [1986] Ch 128. This decision was
reversed by the Court of Appeal [1987] 2 WLR 363, but on different grounds. Indeed,
the criticism of Watts was expressly endorsed by the court (per Balcombe LJ at 376).
111 Treitel, The Law of Contract (6th ed 1983) 275.
112 Idem.
113 Idem.
114 It is difficult to agree with McGregor (para 1489) that the court was "faced with a
deliberate choice between the tortious and contractual measures". Neither the court nor
McGregor identifies what the result of application of the tort measure would be.
115 Cf Taylor, supra n 14 at 145-146.
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Thus, let us suppose that in Watts the evidence established that house
prices had risen by 10070 in the interval between the date of the contract
and its completion date. The damage suffered by the plaintiff is that he
is now required to pay £700 more than he would have had to pay if the
tort had not been committed. Can there be any doubt that an award of
this sum is consistent with the tort principle of restitutio in integrum? 116
Such an award is not based on an expectation theory of recovery, though
the same result might be reached by an application of the contract measure.
The amount recoverable in contract would clearly be the same if the plaintiff had agreed to pay the market value of the defendant's property. Otherwise if the plaintiff could establish that the purchase price was less than
the market value and thus he had made a good bargain.
Watts v Spence did, of course, concern a rather unusual situation, but
other cases will also arise where, although the misrepresentation induces
a contract of sale, recovery on the basis of price paid minus value is either
not feasible or will not meet to any significant extent the plaintiffs
foreseeable damage. This will be the position where property has been purchased for some purpose other than its inherent value or profit earning
capacity. Take, for example, the illustration given earlier 117 of the
misrepresentation on the sale of a weedkiller to a nursery which results
in the destruction of the nursery's entire stock and consequent loss of
profits. Or, take the case of a misrepresentation on the sale of a burglar
alarm and the buyer suffers a substantial loss of stock (which the purchase
of another available system would have avoided) when burglars break into
his premises. 118
Even where property has been purchased for its inherent value or profit
earning capacity, it is clear that price paid minus value is no more than
a prima facie measure. This is exemplified by those decisions in which plaintiffs who had bought goods or a business in reliance on misrepresentation
have recovered in respect of "consequential losses" - a term used in this
context to mean losses over and above the difference between price paid
and value.
5
Consequential losses
In one of the few House of Lords' statements on the present subject,
Lord Campbell LC stated in Davidson v 1Ulloch 119 in 1860 that the object
of damages for fraudulent misrepresentation was not to put the plaintiff
in the position that he would have been in had he not entered the contract
in question. This would mean that the court would have to look at the
consequences of all subsequent events resulting from the contract. Rather,
damages were to be measured by the difference between the price paid and
the value of the property at the time of the sale.
116 See generally Emery, "In Defence of the Rule in Bain v FothergUf' (1978) 42 Conv 338,
342-343 where a similar example is discussed.
117 See text at n 30.
118 Cf Davis and Co (Wines) Ltd v Ala-Minerva (EM!) Ltd [1974] 2 Lloyd's Rep 27, discussed
by McGregor, supra n 2 at para 1485.
119 (1860) 3 Macq 783 at 790; followed in Arkwright v Newbold (1881) 17 Ch D 301 at 312.
Damages for Misrepresentations
397
.However, this did not prevent the Court of Common Pleas some six years
later in Mullett v Mason 12o awarding damages for consequential losses flowing directly from a fraudulent misrepresentation. In that case the plaintiff
purchased an infectious cow which passed on its disease to five other cows
and he recovered not only the difference between the price paid and the
value of the cow but also for the loss suffered as a result of the other cows
contracting the infection. This possibility was reiterated by Cotton LJ in
Arnison v Smith 121 two years after that same judge had held in Peek v
Derry 122 that it was the difference between price and value at the date of
the purchase, not value at the date of the trial, that was the touchstone.
Obviously what is at stake in pegging value as at the date of purchase
is a concern that the defendant not be held liable for collateral events not
flowing directly from the misrepresentation or, to use an example given
in one of the early cases,123 for infirmities occurring in an animal after
the contract rather than those that were there already. There is also present the consideration that principles of restoration to the pre-tort position should not overshadow the defendant's interest in a plaintiff mitigating
and in not being responsible for a plaintiffs decision to take the risk and
affirm the contract once knowledge of the misrepresentation has been
acquired.
However, as later cases indicate, these reservations do not eliminate completely the claims of a plaintiff for consequential losses. Often there will
be no possibility of rescission. Furthermore there may be unavoidable consequential losses flowing from entry into the contract both before and after
knowledge of the misrepresentation. Thus, in the leading New Zealand
decision of Canavan v Wright, 124 the Court of Appeal awarded damages
to the purchaser of a farm for stock losses resulting from a misrepresentation as to the carrying capacity of a farm. Similarly, in Doyle v Olby (Ironmongers) Ltcfl25 and Siametis v Trojan Horse (Burlington) Inc126 purchasers
who were induced to buy businesses by fraudulent misrepresentations as
to takings recovered damages for trading losses incurred while they continued to operate the businesses.
Moreover, in Canavan v Wright and the New South Wales decision of
McAllister v Richmond Brewing Co (NSW) Pty Ltd, 127 the argument that
consequential losses are adequately reflected in the difference between value
and price paid is explored and rejected. The first part of that argument
is that the profit potential of a contract is reflected in both the price paid
and the market value and, on the presumption that price paid will correspond to market value if all representations are true, the award of damages
on the basis of price paid minus actual value reflects the profit potential
lost because of the misrepresentation. Therefore, it is argued that to award
120
121
122
123
124
125
126
127
(1866) LR 1 CP 559.
(1889) 41 Ch D 348 at 371-372.
(1887) 37 Ch D 541.
1Wycross v Grant (1877) 2 CPD 469 at 544-545.
[1957] NZLR 790. See also Gould v Vaggelas (1984) 58 ALJR 560 at 562.
[1969] 2 QB 158.
(1979) 25 OR (2d) 120.
(1942) 42 SR (NSW) 187.
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consequential losses as well as the difference between price and value is
to double count damages. This argument is, of course, interesting in that
it suggests that, notwithstanding many statements to the contrary, the
common basis for awarding damages in misrepresentation cases includes
an expectation element (value being the present capitalized sum of future
expectations). However, that aside, it also involves a fallacy so far as double
recovery is concerned.
A claim for consequential losses is not, if framed properly, a claim for
loss of profits. It is a claim for falling below the pre-tort position or making
a loss on a transaction. Even to give a plaintiff back the total purchase
price indicating no value in the subject matter of the contract at the time
of its conclusion may sometimes not be enough. Thus, in Mullett v Mason,
the infected cow was not only worth nothing but also caused positive harm,
beyond the loss of the purchase price. In fact, even if the cow had "value"
as "scrap", the plaintiff should recover his consequential losses as well as
the purchase price minus the scrap "value". Scrap value is here different
from value as a cow and because of that is to be properly treated as a compensating advantage rather than involving a situation in which value has
not in fact sunk to zero. It is also possible in this case to view the harm
as being separate and distinct from that of purchasing the cow. Thus, even
if the cow continued to have value as a cow because it could be cured,
the consequential losses could be awarded on the basis of an independent
tort of a misrepresentation inducing not the purchase but the action of
placing the cow with others and thereby causing foreseeable loss.
There may, nevertheless, be difficulties involved in ascertaining the proper
extent of a claim for consequential losses and in separating such a claim
from one for loss of the profits that would have been earned if the representation had been true. A good example is provided by Foster v Public
Trustee, 128 a decision of Cooke J in the New Zealand Supreme Court. Here,
by agreement, the judge awarded as damages the amount spent in putting
a piece of farm machinery into the state it was fraudulently misrepresented
to be in at the time .of the sale. This in itself is, of course, one method
of measuring expectation loss, the cost of completion, and because of this
it is surprising to see it so readily accepted as a measurement of the difference between price paid and value. That aside, questions were then raised
about two other items, a claim for loss of farming profits and a loss sustained on employing outside contractors to do the work which the machine
should have done. Both were rejected by Cooke J. The first may have been
a claim for expected net profits and not for actual operating losses and
therefore in conventional theory was properly disallowed. As to the second,
Cooke J stated that, aside from not being causally related to the misrepresentation, it was also not recoverable on the theory that if loss of
profits were not recoverable, the cost of mitigating or avoiding a loss of
profits was also not recoverable. However, in so far as the use of outside
contractors represented a less profitable or more expensive way of performing the labour contemplated than using one's own machinery, this
would seem to present a proper claim for consequential losses at least in
128 [1975] 1 NZLR 26.
Damages for Misrepresentations
399
a situation where it is clear that the plaintiff would but for the misrepresentation have purchased other machinery. While in one sense it is
a claim for profits not being as high as they would otherwise have been,
it is also quite possible to characterise it as either a lost opportunity or
consequential loss of the transaction. Of course, in the particular case, there
may simply have been no evidence of the extent to which this represented
a more expensive way of completing the work than would otherwise have
been employed.
In this respect it is interesting to note that in Canavan v Wright 129 F
B Adams J justified the award of consequential losses by reference to the
decision of the House of Lords in Liesbosch Dredger v S S Edison. 130 In
that case there is a very convincing demonstration of the proposition that
simply to give the market value of a negligently sunk ship does not
necessarily compensate a plaintiff for all his losses. Market price was the
appropriate level of recovery if the vessel could be replaced immediately.
However, as it could not be, compensation had also to be given for pending engagements lost as a result. Of course, this no more than exemplifies
the law of torts' general concern to take account of opportunities of which
someone is deprived because of tortious behaviour. Thus, in a negligence
case involving personal injury, the plaintiff receives compensation at
common law for, inter alia, wages lost and loss of amenities of life. These
provide an acceptable measure of that which has been taken away from
the plaintiff and which needs to be restored to him if he is to be put in
the same position he would have occupied had the tort not been committed.
As explained earlier in this article,131 similar considerations have clearly
been taken into account in misrepresentation cases not involving sales. There
can be no sensible basis for excluding them in sales cases. Of course, in
a number of the latter cases where consequential losses have been awarded
the question of the extent of the plaintiffs recovery has been viewed from
a rather narrow perspective without regard to considerations of lost opportunity. Indeed, they have concerned claims for what the writer has earlier
categorised as basic or positive losses - rather than true consequential
losses - in other words, claims for expenditure incurred which resulted
in a diminution in the value of the plaintiffs pre-tort assets. 132 Doyle v
O/by (Ironmongers) Ltd133 is a good example. No account seems to have
been taken of the opportunity cost to the plaintiff of his entry into the
contract. Damages were simply calculated on the basis of the difference
between outgoings and receipts. Indeed it seems that no award of interest
on that difference was made in favour of the plaintiff. Even in cases where
it is accepted that the measure of damages is the difference between price
paid and market value, the courts will generally take account of the opportunity cost of the induced transaction by awarding interest to the date of
trial or judgment on the sum awarded as damages. However, as Canavan
v Wright demonstrates, recognition of the fact that, in cases of misrepresen129
130
131
132
133
Supra n 124 at 805-806.
[1933] AC 449.
Supra, part III section 3.
See text to n 81-85 supra.
Supra n 125.
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tation inducing sales, price paid minus value does not represent a universal
measure of recovery, necessarily leaves the way open for awards of damages
for proved lost opportunities.
An actual example of such an award is to be found in the case of Hornal
v Neuberger Products Ltd,134 although it may be doubted whether there
was in fact satisfactory proof of lost opportunity. The plaintiff bought
a capstan lathe, which he required for immediate use in his business, from
the defendant in reliance on the latter's misrepresentation that the machine
had been "Soag reconditioned". On delivery the machine was found to be
defective and its repair took some seven weeks, during which time the plaintiff was unable to make use of it. The trial judge dismissed the plaintiffs
action for fraudulent misrepresentation on the ground that he had suffered
no damage. The machine was worth at least as much as he had paid for
it. However, in the Court of Appeal Denning LJ (Hodson and Morris L
JJ concurring) held that some damages could be awarded for the delay
in getting the machine put right. His Lordship stated: 135
[One] way of approaching the case is to ask: what would have been the position if
the statement had not been made? We do not know. The plaintiff might have offered
less, and got the machine for less than it was worth; or he might not have gone on
with the transaction at all, but bought another machine elsewhere, and thus saved
himself the seven weeks' delay in getting this one put right. In either case he would
have suffered damage .... The damage may be difficult to assess. It may only be
£20 to £30. But that there was some damage sufficient to support the action, I do
not doubt.
Judgment was entered for the plaintiff with agreed damages under this
head of £40.
An even more interesting example is given in the judgment of Davidson
J in McAllister v Richmond Brewing Co (NSW) Pty Ltd. 136 According to
the judge, if in the sale of a business, it could be established that at takings
of £120 per week the business had no value and it in fact took only £80
despite a representation of higher than £120 returns, then the plaintiff would
be entitled to further damages as well as the price paid. To allow such a
claim is, however, to move beyond any conventional view of consequential
losses. Even at takings of £80 per week, the business may not be operating
at a net trading loss. However, the net profits may be so small as to deprive
the business of any market value. In such circumstances, an item of damages
reflective of the extent to which the takings fall below the point at which
the commercial value of the business is nothing is really to say that, in
the formula price paid minus value, value can in fact be a negative amount.
The only way that this can be justified in terms of the objectives of tort
damages is on the basis that the net opportunity cost of employing the
price paid in this manner is greater than that price. This assumes a situation where the alternative investment opportunities are at a level where even
to make a profit on the business may be in effect to make a loss. In other
words, losses caused by a misrepresentation are not simply to be measured
134 [1957] 1 QB 247. Cfthe sharp criticism of this decision by J G Fleming (1957) 31 ALJ 27.
135 Ibid at 259-260.
136 Supra n 127 at 200-201.
Damages for Misrepresentations
401
by the purchase price and the extent to which the plaintiff suffers positive
losses in excess of that but rather by the extent to which the plaintiffs capital
is less profitably employed than it would have been but for the tort.
The McAllister example may also, of course, be justified in expectation
terms on the basis that the plaintiff in the example has succeeded in rebutting the presumption that value equals the present capitalized amount of
future profits. To be given his anticipated profits he therefore needs to be
awarded more than the purchase price and one way of reflecting this is
to award the gross amount by which the takings are less than the point
at which the takings represent $0 value. This again suggests a certain
correlation between lost opportunity claims and claims for loss of profits.
6 Difference in price paid and lost opportunities
Viewed from one perspective, the decision in Hornal v Neuberger
Products Ltd can be explained as one where the trial judge applied one
concept of value (market value) and the Court of Appeal moved to another,
that of value to the plaintiff, the latter being fixed on the basis of the
opportunity lost to the plaintiff to make use of the capstan lathe. This
also perhaps explains the differing views of Woodhouse and Cooke JJ in
Scott Group Ltd v McFarlane. For Woodhouse J, market value immediately
after the transaction simply did not tell the whole story and value to the
plaintiff indicated recovery based on the difference between what the company did pay and what it would have paid had the truth been known.
Aside from H ornal and the other cases noted in the course of this paper
which sanction lost opportunity recovery, there is other, albeit weaker,
authority for the Woodhouse measure in the Scott Group case and also
for the further alternative of the loss of another contract that would have
been entered into with a third party were it not for the misrepresentation.
The authority is much weaker in the sense that, with one exception, the
proposition is asserted, not as a justification for the damages actually
awarded, but as a comment that if damages were to be available evidence
supporting such a mode of assessment should have been adduced. Thus,
in Blanke and Burke v New Good Eats Cafe Ltd and Litras137 purchasers
of a restaurant business claimed damages for a fraudulent misrepresentation that the prices on a menu had been approved by a price control body.
The action was dismissed by MacFarlane J of the British Columbia
Supreme Court, inter alia, on the ground that the plaintiffs had not proved
damage. His Honour stated: 138
I think it is well settled that the measure of damages in an action for misrepresentation in the sale of chattels is the difference between the price paid and the fair value
of the subject of the sale at the time of the purchase. There was nothing in the evidence
presented in this case on which I could arrive at a figure which I could say was the
actual value of the business at the time of the sale .... The plaintiffs declined to
state at the trial what they would have paid for the business if the menu later approved
had been the one shown to them. That is, I think, what the evidence should have
revealed, and it does not.
137 [1947] 2 DLR 431.
138 Ibid at 435.
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Of somewhat greater authority is the judgment of Slesser LJ in London
County Freehold & Leasehold Properties Ltd v Berkeley Property and
Investment Co Ltd. 139 This case concerned a fraudulent misrepresentation
on the sale of a block of flats that the rents were paid promptly and without
dispute. In ordering an inquiry as to the damages sustained by the purchasers, Slesser LJ said: 140
The damage will be the difference between £611,000 paid for the property and the
amount which the plaintiffs would have paid had they known the actual circumstances
as to [the] flats.
No authority was cited nor did the other two Court of Appeal judges say
anything which indicated their support for this measure, but it is interesting to note that there was some evidence before the court that, if the
plaintiffs had known the true position, they "might have purchased at a
reduced price".141 Slesser LJ's dictum has since been cited with approval
by the Canadian courts in the leading cases of Hepting v Schaa.f42 and
Chua v Van Pelt. 143
The above measure of damages appears to have been accepted by the
Ontario Court of Appeal in the interesting case of Sodd Corporation Inc
v TessiS. 144 The defendant, a trustee in bankruptcy, advertised for sale by
tender the stock-in-trade of a furniture business carried on by the bankrupt.
The plaintiff submitted a tender which was eventually accepted in reliance
on the defendant's representation that the retail value of the stock was
$33,500, this figure being calculated on the basis of twice the wholesale
cost. It was subsequently discovered that the stock was overvalued by
approximately 100070. The trial judge (Dymond J) awarded the plaintiff
damages of $4,500 for the tort of negligent misrepresentation and this award
was upheld by the Ontario Court of Appeal. Lacourciere JA said: 145
While the [defendant] attacked the assessment of damages as being based in part on
the plaintiffs figures which were found to be inaccurate, we are satisfied that the
assessment of damages can be supported on the basis outlined by the learned trial judge.
Unfortunately, the reasoning of the trial judge is not reported but it appears
that damages were assessed on the difference between the price paid for
the stock and the price that would have been paid had the negligent
misrepresentation not been made. This in turn was calculated on the basis
of first establishing the percentage of the represented wholesale value that
139
140
141
142
143
144
145
[1936] 2 All ER 1039.
Ibid at 1047-1048.
Ibid at 1044.
[1964] SCR 100, see text to n 54 supra.
(1977) 74 DLR (3d) 244, see text to n 56 supra.
(1977) 79 DLR (3d) 632.
Ibid at 635.
Damages for Misrepresentations
403
the plaintiff actually paid (55070) and awarding as damages the amount
by which the price paid exceeded the same percentage of the actual value. 146
The award of $4,500, which exceeded the plaintiff's out-of-pocket loss
by some $2,000 has been criticised as inappropriate in tort but "unexceptionable had the misstatement been a warranty". 147 However, the writer believes
that, in so far as the sum awarded was well below the difference between
the represented value of the goods and their actual value, it did not in fact
reflect the expectation level of recovery. The following simple example will
illustrate the point. Plaintiff (P) buys goods from Defendant (D) for $1,000.
P expects to resell the goods for $1,500 if D's representations are true. The
representations are untrue and the goods are in fact worth only $1,200 on
resale. The evidence shows that P was only prepared to pay a price which
would yield a 500/0 profit. (Hence $1,500 = 500/0 profit on $1,000.) Since
the actual value received was $1,200 and in order to have made his 500/0
profit P would have invested $800 only, the damages should be calculated
as follows:
$1,000 (price paid in anticipation of a 50070 profit) - $800 (price that would have been
paid to secure 50070 profit on value actually received) = $200.
At the end of the day P has $1,400 in his pocket - $1,200 value received
from D and $200 damages. This is clearly not an expectation level of
recovery. An expectation award would give P $300, the amount required
to bring him to $1,500 in the pocket.
As to the further alternative mentioned above of recovery for the loss
of another contract which but for the misrepresentation would have been
entered into with a third party, there is very little authority to be found
in cases involving sales. However, it is interesting to note that this possibility
was recognised by Phippen JA of the Manitoba Court of Appeal in Rosen
v Lindsay.148 This case concerned an action for damages in respect of
fraudulent misrepresentation by a vendor on the sale of an hotel. After
expressly rejecting the expectation level of recovery, his Honour stated that
the plaintiff might possibly have had a cause of action if he had shown
that the $4,000 that he actually made while operating the business was in
fact a loss "because he had given up a more profitable investment or
occupation". 149
An award of damages on the latter basis and one based on the difference
in price paid are both, of course, lost opportunity awards. The first involves
the loss of an opportunity to make a profitable (or perhaps less unprofitable) contract with someone else while the second involves the loss
146 See Schwartz, "Hedley Byrne and Pre-Contractual Misrepresentations: Tort Law to the
Aid of Contract?" (1978) 10 Ottawa LR 581 at 615. On a literal interpretation of the
trial judge's reasoning (as reported by Schwartz at 615), it might appear that she awarded
as damages 55070 of the difference between the represented wholesale value and actual
wholesale value. But it is submitted that it is more likely that she had in mind the measure
stated in the text. As will be explained later, if a true "price paid" measure is applied,
the plaintiff's actual position is generally irrelevant.
147 Idem.
148 (1907) 7 WLR 115.
149 Ibid at 119.
404
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of an opportunity to make a lower priced contract with the same person.
However, it should be noted at this point that, because one is based on
profits and one on price, the way in which the- plaintiffs actual position
is viewed for the purposes of calculating damages is somewhat different.
If the claim is one based on the anticipated profits of another contract,
the plaintiff receives the anticipated benefits of that missed opportunity
but then, depending upon whether his actual position is better or worse
than his financial position prior to the tort, a deduction or addition is made
to the award. If he has nevertheless made some profits, this obviously has
to be set off against the award for the lost opportunity. However, if the
actual transaction has been a losing proposition, he is not adequately compensated for his lost opportunity unless he is given both his net loss on
the actual transaction as well as his anticipated gains on the lost opportunity. In one case, the lost opportunity has been offset to an extent by
an actual trading gain. In the other, he has not only lost the opportunity
but suffered a trading loss as well. (In the case of a chattel, this latter figure
will be the extent to which the chattel is less valuable than·the price paid
and the former figure the extent to which the chattel is more valuable than
the price paid.)
On the other hand, if the claim is one based on difference in price paid,
the plaintiffs actual position is generally irrelevant. Because the focus of
the inquiry is upon price and not anticipated gains and because difference
in price is itself directly a reflection of the position that the plaintiff is
in and the position that he would have been in, albeit in price rather than
profit terms, there is, with one exception, no need to be concerned with
the plaintiffs actual position.
The one exception comes in the case of the sale of a business. As the
McAllister case 150 demonstrates, there comes a point at which value and
also price that would have been paid reach zero. Indeed, sometimes this
may occur even in situations where the business is still showing a small
gain. Such a business may simply have no value or price because people
will not pay anything for a business with such limited potential. Against
this background, it is arguable that the plaintiff should be able to recover
more than the total price paid to the extent that the actual trading position
falls below a position where the business is valueless and has no price.
Simply giving back the price paid as a reflection of the difference between
price actually paid and price that would have been paid (here, zero) may
not do enough to compensate a plaintiff. Another way of viewing this same
point is on the basis of a presumption that any business which is making
a trading loss is not only worth no part of the price that was paid for it
but the extent of the trading loss represents further or additional compensable loss. It is interesting that this, of course, is the same position that
would be reached if the basic mode of assessment is the generally accepted
price paid minus value plus consequential or additional losses instead of
simply difference in price paid.
150 Supra n 127.
Damages for Misrepresentations
405
7 Some contrary authorities
Apart from the judgment of Cooke J in the Scott Group case, the writer
has found only two cases in which the above methods of assessment have
been expressly rejected. In Waddell v Blockey151 the defendant sold the
plaintiff rupee paper, representing it to have been bought on the exchange.
In fact, it was the defendant's own rupee paper. The English Court of
Appeal rejected damages based on the difference between the price the
plaintiff paid and the price at which he could have bought on the exchange. 152 Rather, damages had to be assessed by the standard measure
of the difference between price paid and what he could have resold the
rupee paper for on the day it was purchased. This is clearly the equivalent
of Cooke J's holding in Scott Group.
The second, and more interesting, case is Parna v G & S Properties Ltd153
which involved an alleged fraudulent misrepresentation as to net income
on the sale of an apartment building. At the trial, Ferguson J of the Ontario
High Court calculated damages on the basis of the difference which the
misrepresentation caused to the price paid. This he worked out by first
noting that, as represented, the income was a yield of 9.6010 on the price
paid. (There was also evidence that the plaintiff only made the offer to
purchase on the basis that the net annual profits would return this percentage on his investment.) His Honour then ascertained what sum the
real income was 9.6070 of and awarded the difference between that sum
and the price paid. Thus, the represented income was $24,193. This would
have provided a return to the plaintiff of 9.6070 on the purchase price of
$251,000. The actual income was $21,807 and, in order to have obtained
the desired 9.6070 return on his capital, the plaintiff would have had to
reduce his offer to $226,210. The difference between price paid and the
price that would have been paid if the misrepresentation had not been made
was thus $24,790 ($251,000 - $226,210).
However, this method of assessment was rejected by the Ontario Court
of Appeal on the basis that it represented the contract measure - "the
difference between the actual value and the worth of the property calculated as if the false representations had been true".154 On further appeal
to the Supreme Court of Canada the defendant was successful in a cross
appeal on the issue of liability but Spence J (delivering the judgment of
the Court) affirmed the Court of Appeal's view that the trial judge's assessment of damages "was upon the basis of damages for loss of a bargain".155
In the writer's view, however, the contract measure was not applied by
the trial judge, just as it was not applied in Sodd Corporation Inc v Tessis,156
the later Ontario Court of Appeal decision in which a theoretically similar
method of calculating damages was affirmed. In Sodd the damages award
did not have the effect of giving the plaintiff his expected gains on the
151 (1879) 4 QBD 678.
152 Ibid at 682.
153 (1968) 67 DLR (2d) 279 (Ontario High Court, Ferguson J); (1969) 5 DLR (3d) 315 (Ontario
Court of Appeal); (1970) 15 DLR (3d) 336 (Supreme Court of Canada).
154 (1969) 5 DLR (3d) 315 at 317 per Evans JA.
155 (1970) 15 DLR (3d) 336 at 343.
156 Supra n 144.
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property he thought he was buying. Rather, by receiving the difference
between the price that he did pay and the price that he would have paid
if the misrepresentation had not been made, he is put in the position that
he would have been in had he calculated his profits and price on the goods
as they actually were, not as they were promised to be. His award is in one
sense an expectation award but it is calculated on his expected profit margin
on the smaller amount that he would have paid for the goods as they
actually were, not his expected profit margin on the money he actually
invested. In other words, the ultimate award does not take account of the
investment potential of the difference between the price that was paid and
the price that would have been paid.
The same is also true of the Ferguson J's award in Porno. The difference
between price paid and the price that would have been paid is certainly
calculated on the basis of the profits he hoped to make with his money
but, in so far as the award is a reflection of lost profits, it is so on the
basis of the smaller amount that would have been paid had the truth been
known, not the larger amount that was in fact paid. Of course, the awarding of interest at an appropriate rate to the date of trial might be seen as
making up this difference. However, if justified on the basis of other investment opportunities available for the money rather than the expected profits
from the particular contract, the overall award could still be seen as
restorative rather than as compensating for particular lost expectations..
It also merits observation that in both Sodd and Ferguson J's judgment
in Porno the difference between the price paid and the price that would
have been paid was calculated by reference to percentages of either market
value or actual rates of return. This perhaps provides some explanation
of why they have been perceived as expectation awards or damages for loss
of profits. However, to the extent that the award is based on other evidence
such as convincing testimony as to what the plaintiff would actually have
paid had he known the truth, any necessary link with loss of profits or
expectation disappears. Whether such an award is higher, lower or the same
as an award based on expectation in either of the senses identified will
depend on whether the plaintiffs and the defendant's perception of the
relation between price paid and market or income is good or bad.
This also suggests a general observation about the differences between
contract and tort damages. Tort may simply be concerned to fix damages
by reference to the actual direct financial consequences of the misrepresentation, for example, paying more, irrespective of market and
expectation considerations. However, in the absence of anything else, market.
is frequently a handy basis for measuring loss. On the other hand, in the
case of contract damages, because of the greater concern with foreseeability
of loss, market is generally a much more integral or essential part of damage
calculation. In other words, difference between price paid and price that
would have been paid will be a satisfactory measure in contract so long
as there is reasonable correlation between that measure and the difference
in market price. If there is not, then such a measure has to be discarded.
In tort, given its greater concern with opportunities actually lost or steps
actually taken, difference in price paid will always be a satisfactory measure.
To this extent, it can be argued that the law of torts is far less concerned
Damages for Misrepresentations
407
than contract with objective and external measures of loss such as market
value and much more with the subjective issue of what the plaintiff actually
did, albeit that, as presumptions frequently founded in truth, market price
will be useful either as a basis for calculating difference between the price
paid and the price that would have been paid or as part of the standard
formula price paid less actual market value.
8 The Scott Group case reconsidered
In light of the foregoing discussion, it is now possible to attempt an
answer to the question posed earlier in relation to the Scott Group case.
That question was whether, on the assumption that the plaintiff would
have paid less for the shares if the misrepresentation had not been made,
the excess of price paid was recoverable in tort. It will be remembered that
Cooke J denied recovery whereas Woodhouse J would have awarded
damages of $24,500.
Cooke J accepted that the general purpose of damages in tort is to place
the plaintiff in his pre-tort position. His Honour emphasised thoughout
his judgment that the concern of tort is "reparation for harm done",157
that "the tort measure is the plaintiffs loss, which cannot be ascertained
without taking into account the benefit that the transaction has in fact
brought him",158 and that "it is not a case in contract, where the damages
broadly represent the benefit which the plaintiff was promised". 159 Superficially, his decision to deny recovery can be seen as forwarding that
philosophy. If, after the tort, the plaintiff has more money or other
advantag~s than he had before the tort, it could be said that he hassuffered no damage. The tort may have meant that he has not gained as much
as he could or should have, but he is still better off and lost gains are the
concern of expectation and contract, not restitution and torts.--In. other
words, the compensating advantages of the whole transaction have led to
an improved post-tort position, even perhaps to the extent that the plaintiff should be grateful for the misrepresentation having induced him to act.
Like other judges before him, Cooke J restates the restitutionary pur..
poses of tort damages in the more precise form that 160
the normal measure of damages is the difference between the price paid and the fair
value at the time of purchase ....
In deciding to reduce the general principle of recovery of damages in tort
to these terms, with value having an objective or market sense rather than
connoting value to the plaintiff in the sense of price that the plaintiff would
pay, Cooke J is in fact making a very important judgment about what
"restoring a plaintiff to his pre-tort position" involves. More specifically,
he is disregarding or treating as irrelevant the fact that, before the tort,
the plaintiff was not simply a person with $X but a person with $X plus
157
158
159
160
[1978] 1 NZLR 553 at 585.
Ibid at 587.
Ibid at 585.
Idem.
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Otago Law Review
(1987) Vol 6 No 3
the ability to choose certain courses of action. It can be argued that accurate
restoration to the pre-tort situation will only take place if both elements
are recognised or compensated for. If, but for the tort, the plaintiff would
either have paid the defendant less or would not have entered into the transaction but instead entered into another one with similar expected profitability potential, then, to the extent that these opportunities no longer exist,
they must be compensated for in order to achieve true restoration.
The difference between Cooke and Woodhouse JJ is therefore not one
in which Woodhouse J has under the guise of tort theory moved to
expectation recovery, as Cooke J at times tends to suggest. Rather, it is
similar to the debate that has characterized discussion in the law of contract about what precisely compensating for wasted reliance as opposed
to defeated expectations involves. Does reliance involve not only positive
reliance or does it also embrace wasted or forgone opportunities? Of course,
to view reliance as involving wasted or forgone opportunities may in fact
serve to equate recovery on the basis of reliance and recovery on the basis
of expectation in the sense that the wasted opportunity may have been one
to employ capital elsewhere at the same level of profitability as was expected
from the defective transaction. 161 However, that will clearly not always be
the case in that the defeated transaction may often be the best possible
transaction available had it fulfilled the plaintiffs expectations.
Moreover, if one talks about reliance in terms of paying more than one
would otherwise have (as Woodhouse J did in Scott) rather than the wasted
opportunities of profit elsewhere, reliance and expectation will not generally
equate. Paying more in a business transaction is frequently calculated to
produce greater profits. Thus, an extra investment of $X will normally be
expected to add $X plus $Y to gross income, not just $X. Indeed, this is
roughly reflected by the actual award made by Woodhouse J in Scott of
$24,500, somewhat less than the shortfall in the accounts of $38,000.
In the last analysis, it seems quite clear that the conclusion of Woodhouse
J on the damages issue was not in fact precluded by the well-established
general principle of measurement of damages in torts cases. That wellestablished general principle of measurement simply does not address the
problem in precise enough terms. Thus, the writer sees the judges in Scott
as having had a choice as to which way to go on the issue and, as a result,
their judicial time would have been better employed in analysing the effects
of this choice than in simply asserting consistency with the true doctrine
and reaching contradictory results.
There is, of course, considerable practical wisdom in having price paid
minus value as the prima facie measure of damages in misrepresentation
cases involving sales. Price paid will usually be readily ascertainable and,
while difficult disputes can arise over the facts of value and also at what
point it should be assessed, it is still a more ascertainable standard than
either assessing how much less the plaintiff would have been prepared to
pay had he known the truth and also how much less the "vendor" would
have been prepared to accept or, in the case where a contract would not
161 See eg Fuller & Perdue, "The Reliance Interest in Contract Damages" (1936) 46 Yale
LJ 52 at 74.
Damages for Misrepresentations
409
have resulted had the misrepresentation not been made, what alternatives
were available and what profits they would have produced. Furthermore,
allowing the plaintiff to succeed on the basis of price paid minus value
may not only make trials shorter but also presumably ensure that more
plaintiffs win, notwithstanding the failure of the plaintiff in Scott. To adopt
a fuller sense of reliance would simply provide problems of onus too formidable for plaintiffs in such cases. Nevertheless, the fact must be faced
that the price paid minus value formula involves a one-dimensional view
of what is involved in reliance or acting upon a misrepresentation and this
raises a number of questions. Does the formula have any independent value
aside from the relative ease of calculation as compared with what would
be involved if reliance were viewed in a fuller sense? If not, should it be
completely rejected or do the interests of plaintiffs or the procedural/
evidential advantages of the rule dictate that it be used either exclusively
or unless the plaintiff brings forward compelling evidence upon which to
base an award of damages reflecting reliance in its fullest sense? If it continues to stand as the prima facie measure, should it also be able to be
rebutted by the defendant's showing that the excess of price paid over value
was greater than the higher amount that the plaintiff was induced to pay
because of the misrepresentations?
As the cases discussed in previous sections demonstrate, damages in tort
generally are concerned, not with restoring the plaintiff to the financial
position that he was in the moment before the tort, but rather with restoring him to the position that he would have been in but for the tort. The
costs of tort are measured not simply in terms of the direct money
expenditures caused by the tort, but also by reference to the opportunities
lost - ~g, to use one's now destroyed arm, to earn a living until retirement. Indeed, this philosophy has been accepted in the torts of actionable
misrepresentation. Thus, where the misrepresentation has caused physical
harm the same notions of lost opportunity dictate the level of damages
as they also do where the misrepresentation has caused the plaintiff not
to exploit a financial opportunity. The latter example also provides a good
illustration of the fact that the law of torts is not completely opposed to
awards based on lost profits. Even where the misrepresentation has led to
a personal services contract, this has not prevented the court from assessing damages by reference to the lost opportunity standard of wages that
would otherwise have been earned but for the misrepresentation and the
entry into the contract in question. To deny damages or even damage on
the basis of lost opportunity in the case of misrepresentations inducing
contracts of sale and purchase is therefore to create an exception to general
principles of tortious liability.162
162 It is interesting to note the following observations of Cooke J with regard to the Scott
Group case some five years later in Gartside v Sheffield, Young & Ellis [1983] NZLR
37 at 43: "Generally speaking, damages in tort have been given to compensate for impairment of the plaintifrs existing position. This includes of course loss of prospects. An
assessment of the value of the plaintiffs prospects is often necessary in tort. But it has
not been usual in tort to give damages representing the benefit that would have accrued
to the· plaintiff if the defendant had performed a promise. That has been traditionally
seen as the distinctive role of damages in contract. It was basically this consideration,
together with the desirability of keeping some limitation on liability for negligent mis-
1
410
Otago Law Review
IV
RELATIONSHIP BETWEEN MATTER
MISREPRESENTED AND Loss CLAIMED
(1987) Vol 6 No 3
1 Introduction
There is one other problem that has concerned the writer in the course
of reviewing the authorities governing the measure of damages in misrepresentation cases. Does the availability of damages for tortious misrepresentation depend upon the incorrect or misleading statement affecting the market or objective value of the contract induced? In other words,
are damages recoverable if the misrepresentation does not itself involve
the contract being less valuable?
It is well established that, in calculating tort damages under the price
paid minus value formula, account must be taken not only of the matter
misrepresented but also of all offsetting gains or advantages in other parts
of the transaction. The purpose of the inquiry is to determine the net loss
incurred by the plaintiff through having acted in reliance on the misrepresentation and, accordingly, "any appreciable value received . . . as the
result of the transaction must be brought into account in reduction of the
damages".163 The logical corollary of the theory that the court must take
into account compensating advantages in the rest of the contract should
be that, if there are further disadvantages in the contract other than those
which stem from the misrepresentation itself, they should increase the
award. It should also follow that where the misrepresentation, although
it did induce the contract, has no effect at all on the value received, damages
are still 'recoverable if for other reasons price paid exceeded value. But is
this in fact the legal position?
The issue was first drawn to the writer's attention by the decision of
Cooke J in Capital Motors Ltd v Beecham. 164 There the plaintiff (Beecham)
purchased a car from the defendant motor vehicle dealer in reliance on
the salesman's careless misrepresentation that the car had not had more
than two previous owners. The plaintiff claimed damages in tort for
negligent misrepresentation. Cooke J upheld the magistrate's award of $100
- the difference between the price paid for the car and its market value
at the time of the purchase.
The writer's first impression of this case was that it provided a straightforward example of a situation where application of the tort and contract
measures will lead to the same result. The plaintiff had paid $1,400 for
a car which had a market value of $1,300 as a result of its having had more
than two owners. He recovered in tort the difference of $100. This put him
in the position he would have been in if the tort had not been committed
and the contract not entered into. Applying the contract measure, the
amount required to put the plaintiff in the position he would have been
in if the representation had been true was the same - $100.
statements, that led me to the view that no damages should be given in Scott Group
Ltd v McFarlane . ..."
163 New Zealand Refrigerating Co Ltd v Scott [1969] NZLR 30 at 35 per Macarthur 1.
164 [1975] 1 NZLR 576. For a brief earlier discussion see McLauchlan, "Pre-Contract
Negligent Misrepresentation" (1977) 4 Otago LR 23 at 38.
Damages for Misrepresentations
411
However, a closer analysis of the facts revealed that the plaintiff would
only have been entitled to nominal damages if he had sued for breach of
warranty and, as a result, the contract measure applied. It seems that the
principal reason for the depreciation in the value of the car was not the
fact that it had had more than two owners but that the first owner was
a rental-car company. Cooke J stated that 165
the succession of owners went back to a rental-car company, the car having been used
for rental purposes for about the first 20,000 miles, and the magistrate found that
in the light of this history the true market value was only $1,300.
It follows that, if an action had been brought for breach of warranty, the
plaintiff would have been entitled to nominal damages only because the
cause of the loss was not the breach. If the representation had been true
and the car had had only two owners, he would still have suffered the loss.
He had made a bad bargain. 166
The question then arises whether the damages of $100 ought to have
been recoverable in tort. In other words, was the plaintiff entitled to recoup
the loss resulting from his bad bargain by proceeding in tort as Cooke J
found? It can be argued that damages were not recoverable because there
was no causal connection between the misrepresentation and the loss. If
the representation had been true the plaintiff would still have suffered the
loss. Although a plaintiff can sometimes redress the consequences of his
bad bargain by suing in tort, it must still be shown that the misrepresentation caused some of the IOSS.167 In Beecham Cooke J stated that "it was
reasonably foreseeable . . . that if it had been known that there were more
owners [than two] the market value of the car might well have been
diminished".168 That was certainly so but, on the facts as stated by his
Honour, the greater number of owners did not account for the decrease
in value.
The answer to the question depends on whether, in order to recover
damages in tort for misrepresentation, it is enough that the misrepresentation induces an alteration of position (such as entry into a contract) and
165 Ibid at 581.
166 There is a question, yet to be finally resolved, whether a plaintiff in an action for breach
of contract can elect to claim damages in respect of his relian~e interest (wasted expenses)
or restitution interest where that would protect him against the consequences of his
bad bargain. (The prevailing view is that he cannot; see Ogus, The Law of Damages
(1973) at 351-352, L Albert & Son v Armstrong Rubber Co 178 F (2d) 182 at 189 (1949),
Bowlay Logging Ltd v Domtar Ltd (1978) 87 DLR (3d) 325, C & P Haulage v Middleton [1983] 1 WLR 1461 and CCC Films (London) Ltd v Impact Quadrant Films Ltd
[1985] 1 QB 16.) Even so, it is difficult to see how there can be a reliance or restitution
claim in contract for money paid with a deduction for value received when the contract
has been substantially performed as in Beecham. Furthermore, it is to be noted that
the situation in Beecham differs from the example discussed by Ogus at 351 and the
earlier example at 287. In Beecham the defendant's breach of contract did·· not cause
any part of the $100 to be lost, whereas in the examples given by Ogus there is a causal
connection between the failure to perform and the wasting of a substantial part of the
expenses claimed.
167 See the examples cited by Treitel, supra n 111 at 274 and Ogus, supra n 166 at 287 where.
this requirement is satisfied.
168 Supra n 164 at 581.
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(1987) Vol 6 No 3
loss flows from that alteration, or whether there must be some more
immediate causal connection between the misrepresentation and the loss.
It will be contended below that, while there is some authority for the latter
view that damages must be confined to the amount by which the contract
was less valuable by virtue of the misrepresentation, in principle and on
the balance of authority the former is the better view. On this basis Cooke
J's award of damages in Beecham was correct. 169 The plaintiff was induced
by the defendant's misrepresentation to enter into a contract which he would
not otherwise have entered into and as a result suffered loss - he paid
$1,400 for a car worth $1,300. According to the tort measure of damages
he was entitled to be put in the financial position he would have been in
if the tort had not been committed - the amount by which the value of
the car was less than the price paid.
2 Authorities against recovery in Beecham
The only Commonwealth authority directly in point that the writer has
found is contained in dicta of the New Zealand Court of Appeal in Dimond
Manufacturing Co Ltd v Hamilton. 170 This case concerned an action for
negligent misrepresentation which induced the plaintiffs to buy company
shares. After noting that damages were to be assessed in accordance with
the tort measure of price paid minus value, Thrner J said: 171
And there may in this case be a further adjustment still to be made ... if it can be
shown that in making their offer for the shares these purchasers offered a sum in excess
of what their true value would have been had the balance sheet been correct; for if,
in order to obtain the assets of this particular company, the purchasers were prepared,
in making their original offer, to incur some financial loss in any case, this loss should
be deducted from that which they ultimately sustained, as· a loss not brought about
by the representation.
North P expressed a similar view. 172 The only difference between this and
the Beecham case is that in Hamilton the plaintiff was assumed to know
that he was giving more than market worth but, because he was an anxious
buyer, was willing to do so, whereas the plaintiff in Beecham (and the other
cases to be considered) was simply ignorant.
The writer has also found two interesting American cases which support the view that, in an action for deceit, damages are not recoverable
or must be reduced where the excess of price paid over value arises wholly
or partly from factors outside the scope of the representation. In Goodwin
v Dick173 the plaintiff was induced to buy shares from the defendant by
the latter's fraudulent misrepresentation that they were treasury stock. His
action· to recover damages for deceit failed because, although the shares
were worthless, the evidence established that they would still have been
worthless if the representation had been true. It was held by the Supreme
Court of Massachusetts that the plaintiff had not established an essential
169 However, it is difficult to go along with his Honour's suggestion (at 581) that it was
not necessary to consider the difference between damages in contract and damages in tort.
170 [1969] NZLR 609.
171 Ibid at 638.
172 Ibid at 644-645.
173 107 NE 925 (1915).
Damages for Misrepresentations
413
ingredient of his cause of action, "namely, that he suffered damage in consequence of the false representation".174
The significance of the Goodwin decision is reduced, however, by the
fact that Massachusetts is one of the jurisdictions in the United States of
America where the measure of damages in deceit actions is governed by
the "loss of bargain" rule. 175 Indeed, the court in reaching its decision simply
applied the loss of bargain formula - "he can recover only the difference
in value between the stock which in fact he got and the treasury stock which
he would have got if the representation made by the defendants had been
true".176 On the other hand, it is interesting that, in commenting on this
decision, Professor Palmer states: 177
The court was able to reach this result by a mechanical application of the loss of bargain
formula, without explicitly considering the causation issue, but this would not be possi-:ble in a jurisdiction following the out-of-pocket rule. In such a jurisdiction the result
would doubtless be the same, since the worthlessness of the stock was not attributable
to the misrepresentation.
Of somewhat more significance is Davidge v Guardian Trust Co ofNew
York 178 which was a decision of the Supreme Court (Appellate Division)
of New York, a state which has traditionally favoured application of the
out-of-pocket rule in deceit actions. 179 In Davidge the plaintiff bought
certain bonds from the defendant company relying on the fraudulent misrepresentation that the bonds were secured by a first mortgage. The bonds
were in fact worthless but, even if they had been secured by a first mortgage, they would have been considerably less valuable than the price paid.
It was held that the plaintiff was entitled to recover only the sum that the
bonds would have been worth if they had been as represented - some 40070
of the price paid. The rest of the loss resulted not from the representation
but the plaintiff's own poor judgment. No mention was made of the point
that the plaintiff would presumably not have bought the bonds and therefore would have suffered no loss at all were it not for the defendant's fraud.
Apart from the above cases and a few isolated observations in texts on
the law of misrepresentation,180 the writer has not found any other
authorities which would deny recovery in the Beecham situation.
3 Authorities supporting recovery in Beecham
As suggested earlier, the balance of authority supports the award in
Beecham. That authority dates back to the decision of the English Court
of Appeal in 1877 in TWycross v Grant. 181 Although it did not concern a
174
175
176
177
178
179
180
Ibid at 925.
See McCormick, supra n 25, para 121.
Supra n 173 at 925.
The Law of Restitution (1978) para 3.8 (p 266).
120 NYS 628 (1909), reversed on other grounds 96 NE 751 (1911).
See McCormick, supra n 175.
Kerr on Fraud and Mistake (7th ed 1952) at 496; Spencer Bower and Thrner, The Law
o! Actionable Misrepresentation (3rd ed 1974) para 144, but cf para 206 nl, citing Tote!!
v Antonas (1952) 87 CLR 647 (to be discussed below) with apparent approval.
181 (1877) 2 CPD 469.
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(1987) Vol 6 No 3
common law action for misrepresentation, the case is generally recognised
as one of the leading authorities on the price paid minus value rule. The
plaintiff subscribed for shares in a company on the faith of a prospectus
issued by the defendants, promoters of the company. The prospectus failed
to disclose certain contracts which the defendants had entered into in their
capacity as promoters. This non-disclosure constituted fraud under section
38 of the Companies Act 1867. The shares taken by the plaintiff were worthless and he recovered as damages the total price paid. The interesting feature
of the case for present purposes is that counsel for the defendants argued
that no damages should be awarded since the plaintiff had not suffered
any damage by virtue of the concealment. 182 More particularly, it was
argued that
.
(a) damages were to be measured by the extent to w.hich the assets (and
hence the shares) of the company were diminished in value by reason
of the payments required to be made out of the company's capital under
the concealed contracts, and
(b) since the shares were worthless anyway due to serious defects inherent
in the project for which the company was formed, no damages were
recoverable.
This argument was firmly rejected by both the Common Pleas Division 183
and the Court of Appeal. 184 The essence of the plaintiffs complaint was
that but for the concealment he would not have bought the shares and,
once that was established, he was entitled to recover in respect of the loss
that was the natural consequence of the fraud - in this case, the difference
between the price paid for the shares and their true value at the time of
the sale. Cockburn CJ185 regarded the defendants' contention as
founded on what appears to me to be a transparent fallacy. The complaint of the plaintiff is that he has been induced by a suppression in the prospectus, to which the statute
attaches the character of fraud, to take shares in an undertaking, which, but for this
suppression, he would not have joined, and which has turned out to be worthless a fact which the jury have found in his favour. His grievance is not that he has paid
too high a price, but that he has been induced to take shares which, but for the fraud,
he would not have taken at all. He is, therefore, in the position of a person who has
been induced to take shares and pay the price of them by a fraudulent misrepresentation, and he is, therefore, entitled to recover such damages as have resulted to him
from taking such shares. If this damage extends to the entire price paid for the shares
he is entitled to recover it.
In the course of his judgment Bramwell LJ gave the following instructive
example of a case where, despite there being no direct causal connection
between the misrepresentation and the loss, the damages claimed were
recoverable: 186
By a fraudulent statement that the takings of a business are £50 a week a man is induced
to buy it. It turns out that they are worth only £40 a week, and the business is worse
182
183
184
185
186
Ibid
Ibid
Ibid
Ibid
Ibid
at
at
at
at
at
480.
490-491.
504 (per Bramwell LJ) and 542-543 (per Cockburn CJ).
543.
504.
Damages for Misrepresentations
415
than worthless. But it also appears that if the takings were £50 a week it would be
worthless. Would the damages then be nought? The plaintiff says but for your fraud
I should not have touched it.
This example is clearly indistinguishable from the Beecham situation.
An even more persuasive authority is the decision of the High Court
of Australia in Toteffv Antonas187 where the central issue was that presently
under consideration. The plaintiff was induced to buy the defendant's
business for £2,200 by a fraudulent misrepresentation as to the profits and
takings of the business. The written contract apportioned the purchase price
between goodwill £200, plant £1,750 and stock £250. At the trial of the
plaintiffs action for deceit it was established that the fair value of the
business was £900. The difference between price paid and value was
therefore £1,300. However, the judge held that, since the misrepresentation related only to the value of the goodwill, the damages should be limited
to £200, the amount apportioned by the contract in respect of goodwill.
This decision was reversed unanimously by the High Court. The misrepresentation had induced the entire purchase and the plaintiff was entitled
to the full difference between price paid and value. It was immaterial that
there was no representation concerning the plant and stock which had
obviously been overvalued in the written contract. Although the facts of
Toteff differ from Beecham in that the representation did have some direct
effect on the value of the transaction, the reasoning of the High Court
is clearly applicable to both situations. Central to that reasoning was the
proposition that in an action for tortious misrepresentation the plaintiff
is entitled to recover as damages a sum representing the prejudice suffered
in consequence ofhis altering his position in reliance upon the misrepresentation. He is entitled to say that but for the misrepresentation he would
not have entered into the transaction and, as a result, the focus of the court's
inquiry, so far as damages are concerned, must be on what loss flows from
the action of entering into the transaction. In Toteffthe effect of the misrepresentation was more than to induce the plaintiff to pay £200 for goodwill. He was induced to pay £2,200 for the business as a whole and, as
that business had a real value of £900, the difference of £1,300 was
recoverable.
Some further support for this view is to be found in the leading New
Zealand case of Canavan v Wright. 188 Although the present issue did not
arise, it is interesting that Adams J began his instructive judgment by
observing: 189
In my opinion damages for fraudulent misrepresentation must, in general, be assessed
on the basis of the net loss resulting to the plaintiff by reason of his having acted
in reliance on the representation. Where the tort consists in inducing him to enter
into a single transaction, the net loss is the difference between what he gains and what
he loses by entering into that transaction. It is the entirety of the transaction that matters,
with all its gains and losses. If, by a fraudulent misrepresentation that one of two
articles is worth £5, a man is induced, in one indivisible transaction, to buy two articles
187 (1952) 87 CLR 647.
188 Supra n 124.
189 Ibid at 802.
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for £10, the misrepresented article being in fact valueless, but the other worth £10 or
more, then, unless there be some recoverable consequential damage, the damages are
nil, because the plaintiff has suffered no loss by reason of the fraud. He has got full
value for his money, and cannot sub-divide the transaction into two parts for the purposes of a claim for damages. Conversely, if both articles were valueless the damages
amount to £10, even though the misrepresentation applied to one only. He is, of course,
not entitled to claim in tort for the profit he would have made if the representation
had been true: aliter, if he can found his claim in contract on the footing that the
representation amounted to a warranty.
Finally, a case with essentially the same facts as the last example given
by Adams J came before the Supreme Court of Minnesota in 1894 and
the same result was reached. In Wallace v Hallowel/190 the seller of
promissory notes executed by A and B fraudulently misrepresented that
A was financially sound. No representation was made as to B's financial
standing. Both A and B were unable to pay the notes. It was found as a
fact that the purchaser would not have bought any of the notes but for
the representation. In a well-reasoned judgment Mitchell J rejected the
seller's argument that damages should be limited to the difference between
the actual value of the property and its value if it had been as represented.
It was held that the purchaser was entitled to recover the loss suffered
through acting in reliance on the representation. That action was buying
both sets of notes and therefore the purchaser was entitled to recover the.
difference between their value and the price paid.
In the course of his commentary on this decision, Professor Dobbs
states: 191
In situations like this, courts would probably have little reluctance to permit the plaintiff
to rescind the contract for fraud. If rescission were granted, the plaintiff would return
the worthless notes to the defendant and get back his purchase price. Virtually the
same thing can be accomplished - financially speaking - if the plaintiff sues for
the difference in value between the notes he purchased and the price he paid. If rescission
would give him back the full purchase price, there is little or no reason to deny him
the financial equivalent in a damage action, which differs only in form and theory.
The author then proceeds to consider the counter-argument that the plaintiff in a fraud case should not be put in a better position than if the
representation had been true. 192
Probably, however, this is not objectionable in fraud cases, whatever may be the
appropriate view in the somewhat comparable contract cases. For one thing, the element
of intentional deceit probably warrants a treatment that fully protects the plaintiff
from all losses not clearly too remote. For another, the plaintiff, if allowed a recovery
of his investment, is put in a position better than if the defendant's representation
has been true. But that is not the whole sto~ The plaintiff is not put in a better position
than if the defendant had refused to lie. For if A's credit standing was indeed poor,
as it was, and if the defendant had not lied about it, the plaintiff may very well have
refused to enter the transaction at all, either as to A's notes or as to B's. In such a
case, the plaintiff would not have lost his investment. Thus it is far from clear that
the plaintiff who gets restitution on facts like these really is given undue protection.
190 58 NW 292 (1894).
191 Supra n 25 at 605.
)
192 Ibid at 605-606. See also the valuable decision of the issue by Moncrieff, Fraud and.
Misrepresentation (1891) at 15-17 and 186-188.
Damages for Misrepresentations
The conclusion from all this probably should be that once cause in fact of loss is
established, the plaintiff should be allowed recovery of his investment, even if a benefit
of the bargain recovery is denied on remoteness grounds.
4
The position in principle
It is submitted that Beecham and the cases discussed in the previous
section were rightly decided and that damages should be recoverable in
tort for all disadvantages flowing from the contract induced, whether or
not those disadvantages were related to the matter misrepresented. It seems
quite inconsistent to the writer to treat additional disadvantages as collateral
and not related to the misrepresentation while on the other hand holding
that compensating advantages, whether appreciated by the plaintiff at the
time of the contract or not, are not collateral and have to be taken into
account. On this theory, the plaintiff loses both ways. It seems clear that
either both should be treated as collateral and not related to the misrepresentation or neither should.
On this latter question, it is the writer's view that neither other advantages
nor other disadvantages should be treated as collateral. The action induced
by the misrepresentation is entry into the particular contract and the effects
of this on the plaintiff's position can only be gauged by looking at the
whole contract. Unless there is a clear basis on the evidence for believing
that the plaintiff would have either obtained the additional advantages or
suffered the additional disadvantages anyway, it is proper to take them into
account in adjudicating upon the extent of loss. In the case of additional
disadvantages such losses are properly attributable to the misrepresentation. We shall return shortly to the question of what constitutes a clear
basis for departing from this principle.
Acceptance of the above argument does not, however, lead necessarily
to a position whereby the courts have to award damages for all losses in
any way attributable to entry into the contract or to reduce the award by
reference to all advantages ultimately traceable. to that event. Indeed the
courts, in fixing value in the formula price paid minus value as at the date
of entry into the contract, have made a deliberate decision to treat subsequent gains and losses in value where the cause is "extrinsic" or "independent" as irrelevant or collateral. 193 Similar judgments are also made as far
as claims for consequential losses are concerned. In the sale of a business,
trading losses may properly be seen as attributable to factors other than
the entry into the contract such as the plaintiffs business incompetence
and independent facts such as a decision by a major client to relocate in
another city. Where such lines are to be drawn is of course part of a general
problem of causation and remoteness which is not the writer's concern
here. 194 All that is asserted is that in terms of advantages and disadvantages
already actually present at the time of the contract these should generally
be taken into account whether related directly to the matter misrepresented
or not.
193 See the useful explanation by Cockburn CJ in 1Wycross v Grant, supra n 181 at 544-545.
See also Potts v Miller, supra n 37 at 298 and Gould v Vaggelas, supra n 85 at 562.
194 See eg Dobbs, supra n 191 at 603-604.
418
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(1987) Vol 6 No 3
Aside from the fact that the writer believes these matters are sufficiently
related in a causal sense to the misrepresentation, there are also practical
reasons for not treating them as collateral. The price paid minus value
formula has the attraction that one element in the equation is readily
establishable in most cases. To say that disadvantages unrelated to the
matter misrepresented are not to be taken into account would lead to a
much more complicated evidential inquiry in that it would require the court
to isolate what proportion of the price was paid for the matter misrepresented as well as to value the matter misrepresented. This would
obviously be a complicated and artificial inquiry in the vast majority of
cases. Indeed, the only practical way of giving effect to such a test would
simply be to give the worth of the matter misrepresented but this could
be seen as really moving to an expectation level of recovery.
It is also worth observing that situations can occasionally arise where
misrepresentations operate as important inducements to conclude a contract yet they have neither any effect nor potential effect on the value of
what is received. The representation may relate to a matter which is
peculiarly important to the representee but which has no capacity to affect
the market or objective value of the transaction. They differ from the cases
previously discussed in that the latter involved situations where the representation might have affected, but did not on the actual facts affect, value
received. In the present cases a requirement that the contract must be less
valuable by virtue of the representation would lead to the quite unsatisfactory conclusion that there could be no question of any damages
recovery. Consider the following situations where it should be assumed
that P would not have entered into the contract but for the
misrepresentation.
1 P is induced to buy a house for $50,000 by D's misrepresentation that the house
is situated within the zone of a particular school. It transpires that the property
is worth no more than $40,000 but the fact that it is not within the school zone
does not, and indeed could not, affect its market value.
2 D, a promoter, induces P to take shares in a new company by the fraudulent misrepresentation that
(a) X is chairman of the board of directors, or
(b) X has subscribed for some shares.
The shares are valueless and the company subsequently collapses. The collapse could
not have been averted even if X had been chairman or had invested in the company.
There can be no doubt that P ought to recover damages on the basis of
price paid minus value at the time of the contract.
The question does however arise, in light of the discussion in Part III
of this article, as to whether acceptance of measures of damages other than
price paid minus value should lead to any different view of compensation
for additional disadvantages in contracts induced by misrepresentations.
Should the defendant, as with the plaintiff, be permitted to move away
from price minus value in the sense of showihg that the effect of applying
that formula is to compensate the plaintiff for losses above those actually
related to the matter misrepresented?
Aside from the argument that there is no necessary compulsion to afford
to both plaintiff and defendant equivalent opportunities to move away from
Damages for Misrepresentations
419
a standard measure, it is also clear that allowing the plaintiff to claim
difference in price paid or for a lost opportunity instead of price minus
value is not the converse of a defendant pleading that the matter represented did not cause or was not linked to any or all of the plaintiffs loss.
Rather, the converse is for a defendant to show that the plaintiff, even if
the misrepresentation had not been made, would either have paid the same
price anyway or that he would have entered into an equally disadvantageous
transaction elsewhere.
Of course, if the defendant establishes the first of these he has in effect
'proved that the plaintiff was not induced, except in the rare case where
the matter of inducement was in no sense value or price related. As far
as the second is concerned, were one to accept it as a defence or in reduction
of damages, it would clearly not arise very often. It is simply going to be
a rare case in which the defendant is able to prove that the plaintiff, while
not entering this transaction but for the misrepresentation, would instead
have entered into another disadvantageous contract. Even given an element
of foolishness in other aspects of the transaction in question, the court,
in the absence of clear proof to the contrary, is almost certainly justified
in presuming that were it not for the misrepresentation the plaintiff would
not have entered the contract and still had his purchase money available
to him.
In terms of the cases, it seems that there was probably insufficient
evidence in, for example, Beecham, Toteff, or Davidge, that the plaintiff
would still have suffered some or all of the additional disadvantages even
had he not entered into the particular contract. Simply pointing to some
lack of prudence in the particular transaction should not, in the writer's
view, be sufficient. The Hamilton example is somewhat more difficult.
However, there are two possible answers to it. First, if a plaintiff is prepared
to pay more than market value for a commodity, there is a case for treating
that as relevant in the ascertainment of actual value for the purpose of
the standard formula. In other words, actual value should perhaps be
gauged on a basis other than market value. Secondly, even if the plaintiff
is actually expecting a loss on the transaction rather than a gain, it is
arguable that in tort the court should be as little concerned about those
expectations as it is about expectations of profit and it provides no basis
at all for substituting a lesser figure for price actually paid in the standard
formula.