This article was first published in Greens Business Law Bulletin, Issue 115
(published December 2011) and is reproduced here with the kind permission of
W. Green, The Law Publishers
********************** Damages for loss of use of money as consequential loss: Parabola Investments Ltd v Browallia CAL Ltd [2011] 1 B.C.L.C. 26 Andrew Bowen, Advocate Introduction Claims for consequential loss are notoriously difficult to assess and are rarely litigated to a reasoned decision. In Parabola the Court of Appeal (Mummery, Toulson and Rimer L.JJ.) provided some useful guidance when considering a question of law about the recoverability of damages in deceit for loss suffered, after the discovery of the fraud, through the loss of the availability of the funds from which the victim was defrauded. Background The second claimant, T Ltd, was a special purpose vehicle set up by its beneficial owner G to trade in shares, while the second and third defendants were a stockbroking company, M Ltd, and one of its senior futures brokers, B (the action in relation to the first claimant and first defendant had settled). G was described by Flaux J., the judge at first instance, as one of the most successful traders in certain types of stocks and shares and their derivative products with an established track record of good profitability. When the trading relationship between G and B started in June 2001, B advised G to trade in “contracts for differences” (“CFDs”) which allowed greater margins for the traders and generated substantial commission for M Ltd and bonuses for B. A CFD was described by the judge as: “An agreement to exchange the difference in value of a particular share between the time at which a contract is opened and the time at which it is closed” [3]. Prior to his relationship with M Ltd, most of G’s trading was in physical stocks and he had no experience of CFDs. From June 2001 until February 2002 B fraudulently misrepresented to G (and, thus, to T Ltd) on a daily basis that the CFD trading was profitable whereas in fact it was disastrously loss making from an early stage. B also made a series of fraudulent misrepresentations as to the amount of the funds in the account with M Ltd (in particular, a misrepresentation in October 2001 that the account stood at £9.27 million whereas it was, in fact, at only £2.8 million and had been declining rapidly for months). In February 2002 B’s tangled web unravelled when he was away from the office and another employee of M Ltd informed G that the open positions on his account were such that there would be a margin call and that the amount in the account was only £817,000. G at that stage had been led by B to believe that he had over £10 million in his account. The claim T Ltd claimed damages arising from the second and third defendants’ fraud. In addition to repayment of the difference between the size of the fund between June 2001 and February 2002 plus interest (which M Ltd and B did not oppose if liability was established), T Ltd also claimed damages for its lost opportunity to trade with the fund as it would otherwise have done in the period June 2001–February 2002 (called Stage 1 damages) and for its lost opportunity to trade during the period from the discovery of the fraud (when its relationship with M Ltd ended) and the trial (Stage 2 damages). Before Flaux J. both liability and quantum were in dispute but after 10 days of trial (including three days of cross‐
examination of B which had exposed him as an inveterate liar) B admitted the allegations of fraud. The judge found that on a balance of probabilities, had the fraud not occurred, G would have traded profitably in physical stocks during both Stage 1 and 2 so that the claim was not too speculative to be recoverable, particularly as G had been locked into a depleted trading business because of the fraud. G had led evidence that his profit margin was 50 per cent and the judge awarded damages on that basis. The defendants appealed against the award of damages on the basis that the loss was too speculative. The law The fundamental principle was set out by the House of Lords in Livingstone v Rawyards Coal Co (1880) L.R. 5 App. Cas. 25 at para.39 that the object of compensatory damages was to put the injured party, as nearly as possible, in the position that he would have been in if he had not sustained the wrong for which he was being compensated. Damages for deceit are not limited to reasonably foreseeable loss and can include consequential loss suffered by reason of the fraud (Doyle v Olby (Ironmongers) Ltd [1969] 2 Q.B. 158; Smith New Court Ltd v Scrimgeour Vickers [1997] A.C. 254). The general rule is that damages are to be assessed as at the date the wrong was committed, although a different date can be selected where it is necessary in order adequately to compensate for the damage suffered (Bingham L.J. in County Personnel (Employment Agency) Ltd v Alan R Pulver & Co [1987] 1 W.L.R. 916). Claims for consequential loss can be for the loss of a chance (as in Allied Maples Group Ltd v Simmons and Simmons [1995] 1 W.L.R. 1602). Where, as in Parabola, the judge found that, but for B’s fraud, on a balance of probability T Ltd would have traded profitably at Stages 1 and 2, the court quantifies the loss by making the best attempt it can to evaluate the chances, great or small (unless those chances amount to no more than remote speculation), taking all significant factors into account. In East v Maurer [1991] 2 All E.R. 733, the Court of Appeal held at para.739 that loss or profits was a recoverable head of damage in actions based on fraud provided that the profits were assessed on the basis of profits the claimant might have made but for the fraud. Lord Steyn in Smith New Court at para.282 approved East v Maurer as showing: “That an award based on the hypothetical profitable business in which the plaintiff would have engaged but for deceit is permissible: it is classic consequential loss.” The Court of Appeal Toulson L.J. (Rimer and Mummery L.JJ. adopted his reasons) noted that an appellate court would be slow to interfere with a judge’s assessment and he cited Lord Wright in Davies v Powell Duffryn Associated Collieries Ltd [1942] A.C. 601 at paras 616–617 that: “An appellate court is always reluctant to interfere with a finding of a trial judge on any question of fact, but it is particularly reluctant to interfere with a finding on damages which differs from an ordinary finding of fact in that it is generally much more a matter of speculation and estimate … the court, before it interferes with an award of damages, should be satisfied that the judge has acted on a wrong principle of law, or has misapprehended the facts, or has for these or other reasons made a wholly erroneous estimate of the damage suffered.” In relation to Stage 1 damages, the defendants argued that claim for a specific amount of profits was unproven. At [22], Toulson L.J. said that there was a “central flaw” in that argument. While “some claims for consequential loss could be established with precision (for example, expenses incurred prior to the date of trial)” other claims were “not capable of similarly precise calculation because they involve the attempted measurement of things which would or might have happened (or might not have happened) but for the defendant’s wrongful conduct”. In such a situation the law does not require a claimant to perform the impossible, nor does it apply the balance of probability test to the measurement of the loss. The appeal argument in relation to Stage 2 damages was the more complex argument that those damages were irrecoverable as a matter of law and raised the short point of whether discovery of the fraud provided a cut‐off point. They argued that the judge was wrong to have applied East v Maurer to Stage 2 since any loss should be assessed at the date that the fraud was discovered, at which point T Ltd would then no longer be acting to its detriment under the inducement of a false belief. In rejecting this argument, Toulson L.J. at [34] cited Lord Browne‐Wilkinson in Smith New Court when he said at para.266 that a defendant’s fraud may have an effect on the victim after the truth had come out. The depletion of its trading fund locked it into a disadvantageous position from which it could not extricate itself. At [60] the judge held that the defenders had shown no principled reason why the discovery of the fraud should be a legal cut‐off point in respect of T Ltd’s loss of investment opportunity; as the judge at first instance had found as a matter of fact that the loss had continued after that point, the appeal was dismissed.