Legal Briefing

Rough justice: Court of Appeal rules on measure of damages for negligent misrepresentation

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Corporate and commercial | 01 April 2012

In County Leasing Asset Management Ltd & anor v Michael Green Plant Ltd & ors [2012] the Court of Appeal considered an appeal from Hampton J in the Northampton County Court on the correct measure of damages for a claim in negligent misrepresentation. The case presents an opportunity to revisit the rules on this area and provides helpful insight into the latitude afforded to judges when assessing damages on relatively small claims without the assistance of expert evidence.

Measure of damages for 
negligent misrepresentation

Damages for negligent misrepresentation are governed by s2(1) of the Misrepresentation Act 1967. Section 2(1) states that damages for negligent misrepresentation should be awarded on the same basis as for fraudulent misrepresentation (ie to put the innocent party in the position it would have been in had the misrepresentation not been made) unless the misrepresentor has reasonable grounds, and did believe, that its misrepresentation was true. The courts initially sought to avoid awarding damages to those who had not committed fraud and the provision has subsequently attracted academic criticism for being too harsh. However, the interpretation has now been settled and is expressed most clearly in Royscott Trust v Rogerson [1991] by Balcombe LJ at paragraphs 304 to 305, approving the judgment of Eveleigh LJ in Chesneau v Interhome [1983]:

‘The claim was one under s2(1) of the Act of 1967 and the appeal concerned the assessment of damages. In the course of his judgment Eveleigh LJ said:

“[Damages] should be assessed in a case like the present one on the same principles as damages are assessed in tort. The subsection itself says: ‘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…’ By ‘so liable’ I take it to mean liable as he would be if the misrepresentation had been made fraudulently.”

In view of the wording of the subsection it is difficult to see how the measure of damages under it could be other than the tortious measure and… that is now generally accepted.’

In applying this rule, the courts seek to provide sufficient compensation to put the innocent party in the position it would have been in had the misrepresentation not been made. Where the misrepresentation induced the party to enter into a contract, it follows that the judge must consider what would have occurred had the party not entered into the contract. The judgment in County Leasing shows that this is more an art than a science.

Facts

County Leasing arose from a dispute between County Leasing Asset Management Ltd and another company 
(the appellants) and Mr Hawkes and 
several companies owned and controlled 
by him, including Michael Green Plant 
Ltd (MGP2) (the respondents), over 
the purchase and leaseback of assets 
by the appellants.

In 2004, Michael Green Plant Ltd (MGP1) faced a winding up petition as it was unable to meet debts of £312,000. In an attempt to satisfy these debts, its owner, Mr Hawkes, sought to sell MGP1’s assets – plant and machinery and 45 acres of land in Northamptonshire – to the appellants. The appellants hired a consultant, Gordon Cook, who allegedly had experience in helping distressed and insolvent companies, to assist them. Subsequently, through 
Mr Cook, several agreements were entered into between the appellants and MGP1. The appellants paid £110,000 to acquire the land and £115,000 for the plant and machinery from MGP1. The equipment was subsequently leased back to MGP2. Effectively MGP2 was taking over the business of MGP1 although it would never gain ownership of the equipment. Ultimately, the respondents failed to raise the sums necessary to save MGP1 and it went into liquidation. The respondents stopped paying the rent on the leased equipment in November 2007.

First Instance

The appellants issued proceedings in March 2008 for the remaining sums owed under the lease agreements. The respondents alleged that the appellants had negligently made misrepresentations and counterclaimed for damages. Hampton J found that the appellants had made various misrepresentations, in particular, that Mr Cook was an expert in assisting insolvent companies and would act in the interests of the respondents and that his fees would be around £15,000. Hampton J found that Mr Cook was an undischarged bankrupt who had prioritised his own interests. Furthermore, she found that the appellants’ fees that had been charged to MGP1 totalled £185,000, far in excess of Mr Cook’s initial estimate. As a result, the respondents only recovered £40,000 from the sale of the land, plant and machinery, after the appellants’ fees had been taken into account.

Hampton J awarded damages to MGP2, which she calculated on the basis of what would have happened if the lease back agreement had never been entered into (ie applying tortious principles of damages). Although Hampton J conceded there was little hard evidence on this point, she concluded that, had the appellants not made the false statements, MGP1 would have gone into liquidation and Mr Hawkes would have acquired the equipment from the liquidator for £55,000. This sum was based on Mr Hawkes’ evidence that the equipment would cost £40,000 to £55,000 from the liquidator. She calculated that damages should be awarded of £50,000 (plus interest at 8%), on the basis of the sums actually paid by MGP2 under the leases, less the cost of acquisition. In order to compensate the respondents for the fact that, under this scenario, they would have kept the equipment, Hampton J set off the residual value of the equipment against the appellants’ outstanding property claims.

Court of Appeal

The appellants appealed against this approach to the measure of damages and five grounds of appeal were considered by the Court of Appeal:

  1. The appellants submitted that the judge’s initial premise that, had the false statements not been made, the liquidator would have had the property in his possession, was incorrect. The liquidator had never held the plant and machinery nor had he taken any action to recover it. It was therefore erroneous of the judge to speculate further. In response, the respondents submitted that Mr Hawkes was acting for MGP1 at all times and that it was unrealistic to think that he would have been unwilling to agree the lease on behalf of MGP2 but would have sold the equipment on behalf of MGP1 as the transactions were interrelated. The Court of Appeal agreed with the respondents and found that Hampton J had been correct to conclude that MGP1 would not have leased the equipment and the liquidator would have obtained the equipment after it entered liquidation.
  2. The appellants argued that the judge had failed to give them credit for the use of the equipment by MGP2. The Court of Appeal dismissed this argument, as Hampton J’s award had been made on the basis that the liquidator had acquired the equipment and sold it to MGP2 for £55,000, and not leased it from the appellants.
  3. The appellants suggested that the figure of £55,000 had been provided by Mr Hawkes, who was an interested party and who himself had given conflicting evidence. Elias LJ conceded that Hampton J’s decision had been difficult, but he considered it accurate in the circumstances. In particular, he considered the conflicting evidence, that highlighted a lower figure quoted by the liquidator that had not been shown to the judge, but appeared to support her conclusions. Elias LJ considered Mr Hawkes to be an honest witness and noted that forced sales following liquidation were likely to take place at depressed prices.
  4. The appellants submitted that there was no evidence that the liquidator would have sold the equipment to Mr Hawkes, or that Mr Hawkes would have acquired it. However, Elias LJ concluded that Mr Hawkes had been keen to keep his business afloat and in those circumstances it was an obvious approach to take. Elias LJ concluded that, as it was accepted that £55,000 was a reasonable price, Hampton J had been entitled to rule that the liquidator may have accepted the offer.
  5. The appellants argued that Hampton J should have applied the rule established in Allied Maples Group v Simmons & Simmons [1995] when assessing the likelihood that the liquidator would have sold the goods for £55,000 or at a lower price. Stuart-Smith LJ’s ruling in Allied Maples provides that if, where establishing a loss, a party seeks to rely on the actions of a third party in hypothetical circumstances, the court must be satisfied that there was a realistic rather than a speculative chance that the third party would have acted in a way favourable to the claim. The courts can then quantify the loss by determining the chance that the third party would have acted in the proposed way, and reducing the full loss by a percentage based on that determination. However, Elias LJ ruled that Allied Maples did not apply because the actions of the liquidator were only relevant to the amount that should be set off against the loss, and were not relied upon to establish that loss was suffered. Elias LJ recognised the difficulties in identifying the correct figure in circumstances where several hypothetical possibilities arise and pointed out that, although the decision is rarely accurate, it is the best the law can provide. Stanley Burnton LJ agreed and emphasised the difficulty faced by judges in cases such as these where expert evidence was not available. He concluded that Hampton J had done all she could in the circumstances.

Accordingly, the appeal was dismissed.

Comment

A feature of the Misrepresentation Act 1967 is that tortious damages may be awarded for a contractual claim. It should be remembered however that the basis of any claim for misrepresentation is that a false representation induced the innocent party to enter into a contract. The law concludes that, had the misrepresentation not been made, the contract would not have been entered into and damages are measured 
on that basis.

The decision in County Leasing illustrates that the calculation of damages awards are not an exact science, and in certain circumstances, the courts will be forced to consider a wide range of hypothetical situations in order to do justice between 
the parties. In cases where the sums in dispute would not be considered particularly substantial from a commercial perspective, it is not economical to rely on expert evidence and the judge will therefore 
have a greater responsibility to determine the events that would most likely have unfolded had the misrepresentation(s) not been made. As Stanley Burnton LJ concluded of Hampton J’s efforts, this approach may seem unsatisfactory, but is the best that can be achieved in the circumstances.