[1996] 3 All ER 344

In 1988 the plaintiffs obtained the sale particulars of a bookshop business owned by the first defendant, C, which they were interested in purchasing. The particulars represented that the business had an annual turnover for 1987 of approximately £109,000 and a gross profit of £33,500. The plaintiffs asked C for independent verification of the turnover and profit figures and, at C's request, the second defendant accountants sent a letter to the plaintiffs stating that the turnover of the business for 1987 was approximately £110,000 with a gross profit ratio of 31% which would result in a profit of £34,000. The plaintiffs were satisfied by the letter that the business would cover their financing costs and provide them with an adequate income and proceeded to purchase the business from C for £120,000 with a building society mortgage of £60,000. The plaintiffs subsequently discovered that the business did not generate the turnover or profit purportedly verified by the second defendants and eventually sold the business for less than £60,000, having refused two offers of £76,000 in March 1990. Thereafter, the plaintiffs issued proceedings, claiming damages against C in deceit and against the second defendants in negligence. At the trial, the judge found in favour of the plaintiffs on liability against each of the defendants, but concluded, on the issue of causation, that the plaintiffs had not established on the balance of probabilities that they would not have completed the purchase had the true figures been disclosed and, accordingly, that they had not suffered any loss as a result of the defendants' torts. He therefore gave judgment for the defendants and the plaintiffs appealed.

Held - The appeal would be allowed for the following reasons-
   (1) Where a plaintiff established as a matter of fact that he had been induced to enter into a transaction by a defendant's fraudulent and material representations, or had done so in reliance on the defendants' negligent misrepresentation, he had thereby proved the necessary elements of the torts of deceit and negligence, and in particular had established the causative relationship between the defendants' representations and his entry into the transaction; the only remaining question was what loss he had suffered as a result. In the instant case, the plaintiffs had clearly proved that they had been caused to enter into the contract by the defendants' representations. The true position was that the correct figures were unknown at that time (see p 351 c to p 352 a, p 362 j and p 363 j, post).

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   (2) Where a plaintiff had been induced to enter into a transaction by a misrepresentation, whether fraudulent or negligent, which related to the profitability and, by necessary inference, the viability of a business, he was entitled to recover as damages his income and capital losses, down to the date when he discovered that he had been misled and had an opportunity to avoid further loss. In the circumstances, the plaintiffs had obtained an unviable business and premises with a reduced value (ie £76,000 by March 1990) and limited marketability as a result of entering into the transaction; their capital loss was therefore £44,000 (ie £120,000 less £76,000); but since they were still trading at a profit up to March 1990, they could not claim any loss on income. Further, since the plaintiffs' subsequent refusal to sell out in the first quarter of 1990 was their choice, freely made, they could not claim damages from the defendants for any losses suffered thereafter (see p 355 b to e g to j, p 358 a b, p 362 j and p 363 j, post); Doyle v Olby (Ironmongers) Ltd [1969] 2 All ER 119, Esso Petroleum Co Ltd v Mardon [1976] 2 All ER 5, County Personnel (Employment Agency) Ltd v Alan R Pulver & Co (a firm) [1987] 1 All ER 289 and Banque Bruxelles Lambert SA v Eagle Star Insurance Co Ltd [1995] 2 All ER 769 applied.
   (3) To ensure that the damages assessed were not more than an indemnity for losses in fact suffered, it would be necessary to check the conclusion that the assessed loss was in fact consequential on the fault for which the relevant defendant was liable by comparing the loss consequent upon entering into the transaction with what would have been the position had the represented, or supposed, state of affairs actually existed. If the representations in the instant case had been true, the plaintiffs would have had no difficulty in covering their finance charges, they would not have needed to sell and could have carried on the business even with some erosion of their turnover and profits. It followed that the assessed damages of £44,000 were no more than an indemnity for losses in fact suffered and judgment would accordingly be entered for the plaintiffs against each of the defendants for that sum (see p 361 e to j, p 362 d to j and p 363 j, post).

Notes
For damages for deceit and negligent misstatement, see 12 Halsbury's Laws (4th edn) paras 1140, 1173, and for cases on those subjects, see 34 Digest (Reissue) 377-380, 383-387, 3092-3101, 3126-3166.
   For causation of damage in tort, see 12 Halsbury's Laws (4th edn) para 1141.

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Appeal
By notice of appeal dated 29 June 1994 and supplementary notice of appeal dated 2 December 1994, the plaintiffs, Michael Robert Downs and Jane Rena Downs, appealed from the decision of Robert Owen QC, sitting as a deputy judge of the High Court in the Queen's Bench Division on 13 May 1994, whereby he dismissed their claims for damages for deceit and negligent misrepresentation against the first and second defendants, Kevin Paul Chappell and Messrs Stephenson Smart & Co (a firm). Each of the defendants served a respondent's notice seeking, inter alia, to uphold the judge's decision on further grounds. The facts are set out in the judgment of Hobhouse LJ.

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3 April 1996. The following judgments were delivered.

HOBHOUSE LJ (giving the first judgment at the invitation of Butler-Sloss LJ). In this action the plaintiffs, Mr and Mrs Downs, sue the defendants for damages. Against the first defendant, Kevin Chappell, they claim damages in the tort of deceit. Against the second defendants, Messrs Stephenson Smart, who are a firm of accountants, they claim damages in the tort of negligence. At the trial before Robert Owen QC sitting as a deputy judge of the High Court in the Queen's Bench Division, the judge found in favour of the plaintiffs on liability against each of the defendants, but held that the plaintiffs had failed to prove that they had suffered any loss as a result of the defendants' torts. He therefore gave judgment for the defendants. The plaintiffs have appealed to this court. And the sole remaining issue between the plaintiffs and the defendants is one of causation. The defendants accept the judge's findings on liability.
   In the spring of 1988 Mr Downs was 56 years old and his wife a little older. They had a newsagent's shop in Yeovil, which they had begun to find very demanding, principally because of the long hours it was necessary for them to work. They decided to sell and look for an alternative business to see them through to their retirement. They successfully negotiated a sale of their newsagent shop at a price that would yield net proceeds of about £68,000. They followed up a number of possibly suitable small retail businesses which were for sale. In Dalton's Weekly they saw an advertisement for a bookshop in King's Lynn. They sent off for the particulars. On 23 April 1988 they received particulars from the agents, which read:

The premises were described in more detail. As regards the business, it further stated:

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The price was said to be £120,000 for the freehold property, to include goodwill, trade fixtures and fittings; the stock in trade to be purchased separately at valuation (approx £20,000).
   The judge found:

About ten days later, in early May, the Downs were sent by the agents a second version of these particulars, in which the figures had been changed. The relevant passage now read:

As the judge found, these new figures were a much more attractive proposition for Mr and Mrs Downs and on 16 May they made the journey to King's Lynn, where they visited the shop and met the owner, Mr Chappell. The outcome of the meeting was that the Downs offered, subject to contract, to buy the business and premises for £120,000 plus stock at valuation and Mr Chappell (subject to contract) accepted that offer. The plaintiffs, however, asked Mr Chappell about the turnover and profit figures of the business, particularly those stated in the second version of the particulars. They asked to see the accounts. All that Mr Chappell was in a position to give them was a copy of the one-page 'Trading and Profit and Loss Account for the Year ended 30 September 1986' and a very basic rough schedule setting out some figures for the year ended 30 September 1987. The figures in the schedule included figures which corresponded to those given in the second version of the particulars, but in no way provided any verification of them. The plaintiffs asked for independent verification of the figures. They were not prepared to proceed without this and indeed the building society from whom they were seeking a mortgage would require verification as well.
   Mr Chappell therefore requested his accountants, the second defendants, to send to the plaintiffs a letter of verification. In fact there was already such a letter in existence because an earlier prospective purchaser, Mr Booty, had asked for one in February. So Mr Chappell knew what he was asking his accountants to provide. On 24 May the second defendants sent the letter to the plaintiffs. It read:

This letter (the 'Booty' letter) was sent with the knowledge and authority of Mr Chappell. Mr Chappell knew that the figures in it were false. The turnover had not been approximately £110,000; the normal gross profit percentage was not in the region of 31%; the profit was not £34,000. The explanations given by the defendants at the trial were rejected by the judge. He was not prepared to treat Mr Chappell as a truthful witness. The judge likewise did not accept Mr Dodds' attempt to justify the letter. The second defendants were recklessly negligent. They had not ascertained that the takings for the year were approximately £110,000, or any sum. They had no basis for the statement that it was normal to expect Mr Chappell to achieve a gross profit percentage in the region of 31%. The second defendants should have said, as was the truth: 'We are unable to verify the figures which Mr Chappell has given you.' If they were unhappy about doing that, they should simply have declined Mr Chappell's request that they send the 'Booty' letter to the plaintiffs. In fact, the second defendants did not complete any accounts for Mr Chappell's business for the year ended 30 September 1987 until September 1989, some 16 months later.
   The figures given by Mr Chappell to the plaintiffs, and purportedly verified by the second defendants, satisfied the plaintiffs. The figures showed a business with a very healthy, and growing, turnover with a substantial gross profit margin which would cover their financing costs and leave them with enough to live on. The plaintiffs decided to go ahead. They told Mr Chappell that the information was exactly what was required and that it had been passed on to their mortgage broker. They completed on the sale of their Yeovil business. They obtained and accepted an offer of a £60,000 mortgage on the King's Lynn shop from a building society and on 15 July exchanged contracts with Mr Chappell. Completion took place on 21 July. They purchased the stock at a valuation of £24,507.
   I will have to return to what happened to the business subsequently. But, for present purposes, it suffices to say that it turned out that the business was not a viable one for the plaintiffs. It could not generate the turnover and profits necessary to cover the plaintiffs' financing costs and provide them with enough to live off. Despite the injection of additional capital there was not enough money to run it. There was an inevitable decline and they have now lost the greater part of their investment.
   The judge found that the plaintiffs relied upon the figures which they were given by Mr Chappell and the second defendants in the letter of 24 May in deciding to buy. The judge expressly accepted Mr Downs's evidence that 'they would not have contracted without verification of the figures for 1987'. However, the judge continued:

The judge then considered the figures and concluded:

This finding was, in the judge's judgment, fatal to the plaintiffs' case against both defendants and he held that they had failed to prove causation.
   However, he went on to make findings on the issue of damages. He quoted from the judgments of Bingham LJ in County Personnel (Employment Agency) Ltd v Alan R Pulver & Co (a firm) [1987] 1 All ER 289, [1987] 1 WLR 916 and Staughton LJ in Hayes v James & Charles Dodd (a firm) [1990] 2 All ER 815. He considered the argument of counsel for the plaintiffs that the plaintiffs had committed themselves to the purchase of a business which they could not afford, in the sense that it could not generate sufficient income to finance the necessary borrowing and provide them with a living, and that accordingly their loss should be assessed by reference to the annual shortfall in income, ie the difference between the income that was generated and the income that would have been generated had the representations been true. The judge was prepared 'in the unusual circumstances of this case' to adopt that approach, but he concluded:

The judge's approach
   The judge made a comparison. He took the figures in the 24 May letter and compared them with what he considered would have been truthful figures derived from the accounts produced by the second defendants 16 months later. He then asked the question what would have happened if the plaintiffs had been given the 'truthful' figures and treated the answer to that question as decisive of the plaintiffs' ability to claim against either defendant. He then went on to adopt a similar approach in assessing damages. In my judgment the judge was in error in the approach that he adopted.
   I will take the tort of deceit first. For a plaintiff to succeed in the tort of deceit it is necessary for him to prove that: (1) the representation was fraudulent; (2) it was material; and (3) it induced the plaintiff to act (to his detriment).
   A representation is material when its tendency, or its natural and probable result, is to induce the representee to act on the faith of it in the kind of way in which he is proved to have in fact acted. The test is objective. In the present case it is clear that the test of materiality was satisfied and the contrary has not been suggested.
   As regards inducement, this is a question of fact. The judge has found that the representations made did induce the plaintiffs to enter into the relevant transaction, that is to say, the contract with Mr Chappell to purchase his business and shop. The plaintiffs were induced to act to their detriment. The word 'reliance' used by the judge has a similar meaning, but is not the correct criterion.
   The plaintiffs have proved what they need to prove by way of the commission of the tort of deceit and causation. They have proved that they were induced to enter into the contract with Mr Chappell by his fraudulent representations. The judge was wrong to ask how they would have acted if they had been told the truth. They were never told the truth. They were told lies in order to induce them to enter into the contract. The lies were material and successful; they induced the plaintiffs to act to their detriment and contract with Mr Chappell. The judge should have concluded that the plaintiffs had proved their case on causation and that the only remaining question was what loss the plaintiffs had suffered as a result of entering into the contract with Mr Chappell to buy his business and shop.
   The position is similar in relation to the second defendants. As already pointed out the judge asked himself the wrong question. At the time the second defendants wrote the May letter and indeed for sometime afterwards no one knew what the true figures were. (Indeed, it is very doubtful whether even the figures produced by the second defendants in the autumn of 1989 could properly be described as 'true' figures.) The only answer that the second defendants could have properly given was that they did not know. It was wrong both factually and legally for the judge to create the hypothesis that the second defendants could, and would, have given the plaintiffs accurate figures so as to give them an accurate basis upon which to decide whether to make a contract with Mr Chappell. Here again, what the judge should have done is to ask simply whether the plaintiffs entered into the contract in reliance upon the second defendants' letter. He answered that question in the affirmative. The causative relationship between the second defendants' tort and the entry into the contract was351 established. That leaves the question: what loss did the plaintiffs suffer as a result of entering into the contract?

Damages
   The factual starting point for the assessment of damages is that the plaintiffs purchased Mr Chappell's shop and business. If Mr Chappell had not been fraudulent and the second defendants had not been negligent, the plaintiffs would not have entered into the transaction. This is therefore, factually, a 'no-transaction' case. The plaintiffs' damages have to be assessed by reference to what they have lost as a result of entering into the transaction. As I will explain later, this statement of the causative principle to be applied is subject to a qualification. But it provides the only valid starting point and to take any other starting point is unsound. The causal relevance of the defendants' torts was that they caused the plaintiffs to enter into the transaction. It follows that the recoverable damages must have been caused by that consequence.
   No question of remoteness of damage arises. It was the intention of the defendants that the letter of 24 May should have the result that the plaintiffs buy the shop and business. They also knew that the plaintiffs were borrowing a substantial sum to finance the purchase and that if the business did not generate sufficient turnover and profit to finance the borrowing and enable the plaintiffs to live, it would not be viable for them. All parties must also have been aware that property values can go down as well as up and that if the plaintiffs should have to sell they might have to do so at a loss.
   It is, of course, for the plaintiffs to prove their loss and that it was caused by the defendants' torts. The plaintiffs' case as pleaded was a simple one. They pleaded their outlay of £144,500 and said that against that sum they would 'give credit for such sums as they receive upon the sale of the business, the property and the stock in trade alternatively credit for the value of such items at the date of trial'. The plaintiffs accepted that at the date of trial the market value of the shop was £60,000; no value was attributed to the business and no point was taken on the value of the stock. The plaintiffs' primary case was therefore that they were entitled to recover £60,000, being the difference between £120,000 and £60,000. In the alternative, the plaintiffs said that if they were to be held responsible for a failure to mitigate through not having accepted an offer of £76,000 for the shop in March 1990, their recoverable damages would be £44,000. Between the time of the trial and the hearing of this appeal, the plaintiffs have sold the shop at a price substantially lower than £60,000. They applied to this court to adduce additional evidence to cover the financial consequences of that sale and to justify a claim for damages higher than the £60,000 figure. We have not acceded to this application; the additional evidence does not add anything legally material.
   At the trial the plaintiffs also put forward another alternative case based upon an alleged annual loss of £5,000 profit. They compared the profitability of the business in fact with that represented. The figure which would result from this claim would depend upon the number of years taken into account. This was the case which the judge was rejecting in the passage I have quoted from his judgment.
   The defendants' case was that £120,000, the price paid by the plaintiffs, corresponded to the actual value of what they acquired. The judge found that the value of the freehold property, the shop and the flat over it, was in July 1988 between £90,000 and £95,000: he took £92,500 as being the value. The fixtures352 and fittings of the shop were valued at £7,500. That left a price of £20,000 as being attributable to the goodwill of the business. The evidence was that it was an accepted rule of thumb that the goodwill of a bookshop was normally calculated by applying a multiplier of between 2 and 3 to the annual net trading profit. On this basis the sum of £20,000 corresponded to an annual net trading profit of between £7,000 and £10,000. It is accepted that it would have been fair in July 1988 to use a figure of £10,000 pa. The defendants therefore say that the plaintiffs got what they paid for and have suffered no loss. This approach looks at the figures simply on a capital account basis comparing the price paid with the capital value of what was acquired.
   Alternatively, the defendants submitted that if a court was to consider the outcome of the plaintiffs' acquisition of the shop and the business, the plaintiffs' lack of success was attributable to changing market conditions and to their own lack of experience in running a bookshop. As appears from the quotations that I have already made, the judge substantially accepted this submission.
   The defendants also rely upon the fact that by the end of October 1989 the plaintiffs realised that they had been misled and that the figures for the business were not as had been represented to them. They decided to try to sell the shop. Initially they were advised to ask £140,000 but received no offers. They took further advice and after the new year of 1990 made further attempts to sell, being prepared to accept £80,000. In March 1990 they did not accept two offers of £76,000. They accepted an offer of £81,000, but the buyer then failed to proceed. The defendants submit that the plaintiffs' damages cannot exceed the loss which they would have suffered if they had sold in the spring of 1990. Down to that date the business had been showing a profit (albeit less than expected), therefore there was no loss on the income account. The depreciation in the value of the property was attributable to the downturn in the property market and was not related to the performance of the business.
   In this court we have been assisted by the argument of counsel and a closer analysis of the figures that were in evidence at the trial. In particular, this has enabled a better assessment to be made of the trading results of the business both before and after its acquisition by the plaintiffs. I append to this judgment a schedule which sets out the figures for the three years to September 1986 and the four years July 1989 to July 1992. The schedule also includes figures for the year ended September 1987 and the ten-month period ended July 1988 as subsequently prepared by the second defendants. The figures for the year ended September 1987 cannot be treated as accurate; the gross profit of 34á46% cannot have been achieved. The stock figures used were not substantiated. Mr Downs challenged the 1987 figures as soon as he saw them in October 1989. Since Mr Chappell did not give credible evidence, the true position for 1987 has remained unascertained. Leaving out of account the period ending September 1987, the level of profitability of the business is remarkably steady. Under the management of Mr Chappell the gross profit percentage was around 27%. Under the management of the plaintiffs the gross profit percentage was around 28% except for the year ended July 1991 when it fell to just over 26%. The 26á31% figure for the ten-month period ended July 1988 was also consistent for the general picture. There is no evidence that the plaintiffs were insufficiently experienced to be able to trade profitably.
   As regards turnover, the picture presented is that Mr Chappell was, in the three years to September 1986, building up his stock and his turnover. By contrast, the353 plaintiffs were from 1990 purchasing each year £9,000 worth of stock less than the preceding year. They said that they could not afford more. Their turnover declined similarly.
   Mr Downs gave evidence about the relevance of turnover and profitability:

In summary, the plaintiffs' evidence was that the turnover and gross profit potential of the business was not in truth sufficient to make it a viable business for the plaintiffs, having regard to the borrowing commitment they had to undertake and their need to generate enough income to live off. Even with market trends as they were, if they had been able to start from a turnover figure of £110,000 and a gross profit figure of around £30,000, the picture would have been markedly354 different. The figures given in the schedule for the mortgage interest paid by the plaintiffs represent the two-thirds which they attributed to the business; they attributed one-third of the mortgage interest to the flat. In my judgment, the findings of the judge on the question of damages were too much influenced by the findings which he had earlier made on causation. The figures show, in corroboration of the evidence of the plaintiffs, that the business was not able to generate sufficient profits to be viable and that this was attributable to the level of turnover.
   By the end of 1989, after about one and a half years' trading and the confirmation by the second defendants in October 1989 that the figures which they had given to the plaintiffs in May 1988 were not a true statement of the turnover of the business, the plaintiffs knew that they had an unviable business. Accordingly, as a matter of factual causation, the consequence of the plaintiffs having purchased the business and premises from Mr Chappell was that they found themselves 18 months later with an unviable business and shop premises with a reduced value and limited marketability. At this time the property was, on the evidence, worth about £76,000. (The plaintiffs have not sought to make any deductions from this figure as at this date.) The loss was therefore, prima facie £44,000 (£120,000 minus £76,000) on capital account. At this time the plaintiffs were still trading at a profit and could not claim any loss on income account; the net trading profit before financing on the first year's trading was £15,749 and the next six months showed at least £7,000. After allowing for financing charges, there still was not any actual income account loss. The defendants did not submit that there should be any set-off against the plaintiffs' capital account loss.
   It is not in dispute that it was possible for the plaintiffs to sell out in the first quarter of 1990. If necessary they would have had to abandon the business. Indeed, one or more of those expressing an interest in buying the shop and the flat in the early part of 1990 were not doing so for the purpose of running a bookshop. Since the business was unlikely to be capable of covering the cost of servicing its capital, it is not suggested that its goodwill had then a significant market value. It follows that any losses which the plaintiffs suffered after the spring of 1990 were not caused by the defendants' torts, but by the plaintiffs' decision not to sell out at that date for a figure of about £75,000. The only basis upon which the plaintiffs might have been able to recover any later loss would have been that they had been reasonably but unsuccessfully attempting to mitigate their loss further and had unhappily increased their loss. (See McGregor on Damages (15th edn, 1988) paras 323-324.) On the facts of this case the plaintiffs are unable to make such a claim and have not sought to do so. They have argued that they did not act unreasonably in rejecting the offers of £76,000 in March 1990. Even accepting that they acted reasonably, the fact remains that it was their choice, freely made, and they cannot hold the defendants responsible if the choice has turned out to have been commercially unwise. They were no longer acting under the influence of the defendants' representations. The causative effect of the defendants' faults was exhausted; the plaintiffs' right to claim damages from them in respect of those faults had likewise crystallised. It is a matter of causation.
   The correct finding of fact is that the plaintiffs suffered a loss of £44,000 as a result of entering into the contract with Mr Chappell.

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The law
   The courts have found troublesome the questions raised on the assessment of damages for the giving of negligent or fraudulent advice or information. There are a large number of reported decisions. The role of these authorities, and of their citation in other cases, is limited. Causation is a question of fact. The related questions of mitigation of loss, remoteness and contributory negligence are based upon legal principles and the citation of authority may be necessary to derive those principles and clarify their application. Similarly, the citation of authority may be appropriate accurately to identify the wrong in respect of which the claimant is entitled to recover damages. A breach of warranty does not have the same consequences as a failure to advise or warn. But when one is concerned, as here, with what is purely a question of causation, the citation of authority may be of little assistance.
   In the present case, the feature which is said to give rise to difficulty is the fact that the loss of value suffered by the plaintiffs between 1988 and 1990 primarily reflected the fall in the market value of commercial and residential properties. Whilst such fluctuations are not unforeseeable and there were other factors which contributed, the defendants argue that whatever property the plaintiffs had bought they quite probably would have suffered a similar loss. Since the plaintiffs are unable to say that they suffered any significant loss on the basis of comparing the contract price with the value in July 1988 of what they then bought, the character of their claim is really a claim for consequential loss. They have suffered a consequential loss through having bought a property which they would not otherwise have bought and which they, on discovering the deception, could only dispose of at a loss.
   The starting point for any consideration of the law of damages is the statement of Lord Blackburn in Livingstone v Rawyards Coal Co (1880) 5 App Cas 25 at 39 that the measure of damage is-

This principle has been applied to the torts of deceit and negligent misrepresentation in cases, which bear a marked similarity to the present case.
   In Doyle v Olby (Ironmongers) Ltd [1969] 2 All ER 119, [1969] 2 QB 158 Mr Doyle saw an advertisement of an ironmonger's business for sale at £4,500 for the lease of the shop, the business and the goodwill, the stock to be taken at a valuation. He made inquiries and the vendor produced accounts for the preceding three years which showed satisfactory turnover and annual profits. Mr Doyle agreed to buy and went into occupation. Having undertaken liabilities of some £7,000 he soon found that the turnover had been misrepresented and that the vendor's brother was, contrary to what had been represented, retaining a part of the business and was trading in competition with him. After three years' disastrous efforts to trade Mr Doyle sold the business, but was left with liabilities of some £4,000. The Court of Appeal held that he should recover these losses. Lord Denning MR said ([1969] 2 All ER 119 at 122, [1969] 2 QB 158 at 167):

In the same case, Winn LJ said ([1969] 2 All ER 119 at 123-124, [1969] 2 QB 158 at 168):

   Esso Petroleum Co Ltd v Mardon [1976] 2 All ER 5, [1976] QB 801 was a case of negligence. The negligent party (Esso) misrepresented the throughput of a filling station in order to induce Mr Mardon to take a lease of the filling station. Mr Mardon did his best, but he lost his capital and incurred a large bank overdraft as a result of his trading losses. Lord Denning MR, with whom Shaw LJ agreed, said ([1976] 2 All ER 5 at 16, [1976] QB 801 at 820):

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   These cases show that where a plaintiff has been induced to enter into a transaction by a misrepresentation, whether fraudulent or negligent, he is entitled to recover as damages the amount of the (consequential) loss which he has suffered by reason of entering into the transaction. The principle is the same. Where the representation relates to the profitability and, by necessary inference, the viability of the business, the plaintiff can recover both his income and his capital losses in the business.
   Hayes v James & Charles Dodd (a firm) [1990] 2 All ER 815 was a similar case, but the plaintiffs' complaint was that their solicitors had failed to give them proper advice before they bought new premises for their motor repair business. The solicitors negligently failed to advise them that they had no legal right to use the only adequate means of access. As a result, the plaintiffs bought premises which were wholly unsuitable for their business and incurred substantial losses and had to close down. It was held by the judge and by the Court of Appeal that the plaintiffs were entitled to recover damages on the basis of the capital expenditure thrown away in the purchase of the business and the expenses incurred. The Court of Appeal refused to adopt the 'diminution in value' measure of damages used in surveyor's negligence cases.
   Staughton LJ adopted the principle stated by Lord Blackburn and continued ([1990] 2 All ER 815 at 818):

He contrasted this with what he called the 'successful-transaction method', being the test adopted in Perry's case where the plaintiff would still have entered into the transaction if he had been properly advised, albeit at a lower price. The other members of the court expressly agreed with Staughton LJ's adoption of the 'no-transaction method'.
   Other authorities illustrate the difference between the 'no-transaction' sale of business cases and cases where the court has treated the transaction as 'successful' and has assessed damages by comparing the value of the asset acquired and the sum paid-the 'diminution in value' approach. Into the latter category come the surveyor's negligence cases. Watts v Morrow [1991] 4 All ER 937, [1991] 1 WLR 1421 is an example. The plaintiff had bought a house on the faith of the defendant's report that there were only limited defects requiring repair. In fact the defects were much more extensive. The question was whether the plaintiff could recover the cost of doing these additional repairs or simply the diminution in value of the property in its actual state by comparison with the price paid. The Court of Appeal considered that the question was governed by Philips v Ward [1956] 1 All ER 874, [1956] 1 WLR 471 and Perry v Sidney Phillips & Son [1982] 3 All ER 705, [1982] 1 WLR 1297 and that the cost of carrying out the repairs could358 not be recovered. To award the plaintiff the cost of repairs would be to award him more than he had in fact lost by entering into the transaction.
   East v Maurer [1991] 2 All ER 733, [1991] 1 WLR 461 was a fraud case. Doyle v Olby (Ironmongers) Ltd [1969] 2 All ER 119, [1969] 2 QB 158 was applied. In order to induce the plaintiff to buy the defendant's hairdressing salon, the defendant fraudulently represented that he would not any longer be working at another salon in the area. The representation was untrue and as a result the plaintiff was unable to run a successful business at the premises which he had bought. He did not succeed in selling them until some three years later. The Court of Appeal held that the damages for deceit were to be assessed on the basis that the plaintiff should be compensated for all the losses he had suffered including the loss on the resale and his loss of profits.
   In general, it is irrelevant to inquire what the representee would have done if some different representation had been made to him or what other transactions he might have entered into if he had not entered into the transaction in question. Such matters are irrelevant speculations (see eg United Motor Finance Co v Addison & Co Ltd [1937] 1 All ER 425 at 429).
   In 1986 the law was reviewed by Bingham LJ in County Personnel (Employment Agency) Ltd v Alan R Pulver & Co (a firm) [1987] 1 All ER 289, [1987] 1 WLR 916. He identified a number of different strands in the law regarding solicitors' and surveyors' negligence and the importance of what he called the 'diminution in value' approach. But he also stressed that the law should not be applied 'mechanically' (see [1987] 1 All ER 289 at 297, [1987] 1 WLR 916 at 925-926). No single approach was to be applied inflexibly. He recognised that the date at which damages fell to be assessed might vary from case to case. This confirms that questions of damages are primarily questions of fact to be decided on the facts of each case. In that case the Court of Appeal declined to apply the diminution of value approach; it was inappropriate and would have led to injustice.
   Where a party has been misled, it must always be relevant to consider his position when he discovered the truth. Until that time the misrepresentation will be continuing to affect him and he cannot be expected to mitigate his loss. This is recognised in some of the older share purchase cases, for example, Twycross v Grant (1877) 2 CPD 469.
   This factor was relevant in Naughton v O'Callaghan (Rogers and ors, third parties) [1990] 3 All ER 191. In 1981 the plaintiffs had bought a thoroughbred yearling colt called 'Fondu' for 26,000 guineas. In fact a mistake had been made and its pedigree was not as represented. Its true pedigree made it suitable only for dirt track racing in the United States, not for racing in this country. This mistake was not discovered until about two years later, by which time the colt had been raced unsuccessfully in the UK and its value had as a result fallen to £1,500; substantial training fees had also been wasted. The defendants did not dispute that there had been a negligent misrepresentation. The issue was damages. The defendants said that the actual value of the colt at the time of its purchase was 23,500 guineas and that the plaintiffs' damages should be limited to the difference, 2,500 guineas: the 'diminution in value' test. Waller J held ([1990] 3 All ER 191):

The effect of his decision was that he assessed the plaintiffs' losses, including consequential losses, as at the date of their discovery of the misrepresentation. He followed and applied Doyle v Olby (Ironmongers) Ltd and the general principles referred to by Lord Wilberforce in Johnson v Agnew [1979] 1 All ER 883 at 889-890, [1980] AC 367 at 400-401. In reaching his conclusion he stressed the nature of the transaction, the purchase of a colt to train and race. He also pointed out that the fall in the value of the colt was attributable to its failure to race successfully, not to any general fall in the market value of colts. This was relied upon by the defendants before us as a ground of distinction from the present case.
   Banque Bruxelles Lambert SA v Eagle Star Insurance Co Ltd [1995] 2 All ER 769, [1995] QB 375 was a case which turned upon the collapse of the property market. It was a negligence case. The plaintiffs were mortgagees. The defendants were valuers. The defendants negligently overvalued properties and the plaintiffs then accepted mortgages of the properties. Later, the property market collapsed and the various borrowers defaulted and on sale the plaintiffs obtained substantially less than the sums they had advanced. The relevant question was whether the plaintiffs could include in their damages the difference in the value of the properties between the time of entering into the mortgages and the sale of the properties. The Court of Appeal ([1995] QB 375 at 376) held that-

Having extensively reviewed the authorities, both English and Commonwealth, the court summarised its conclusions. It is apposite to quote from these conclusions, but adopting a different order:

   These citations confirm that the approach I have adopted is correct. Causation and the assessment of damages is a matter of fact. In a misrepresentation case, where the plaintiff would not have entered into the transaction, he is entitled to recover all the losses he has suffered, both capital and income, down to the date that he discovers that he had been misled and he has an opportunity to avoid further loss. The diminution in value test will normally be inappropriate. Where what is bought is a business, the losses made in the business are prima facie recoverable, as is the reduction in the value of the business and its premises. Foreseeable market fluctuations are not too remote and should be taken into account either way in the relevant account. These cases do not, however, discuss whether there is any question of causation beyond the no-transaction test. In my judgment it may still be necessary to consider whether it can fairly and properly be said that all the losses flowing from the entry into the transaction in question were caused by the tort of the defendant. I now turn to this qualification.

The qualification
   In my judgment, having determined what the plaintiffs have lost as a result of entering into the transaction-their contract with Mr Chappell-it is still appropriate to ask the question whether that loss can properly be treated as having been caused by the defendants' torts, notwithstanding that the torts caused the plaintiffs to enter into the transaction. If one does not ask this additional question there is a risk that the plaintiffs will be overcompensated, or enjoy a windfall gain by avoiding a loss which they would probably have suffered even if no tort had been committed. This would offend the principle upon which damages are awarded (see Livingstone v Rawyards Coal Co (1880) 5 App Cas 25 at 39 and Dodd Properties (Kent) Ltd v Canterbury City Council [1980] 1 All ER 928, [1980] 1 WLR 433 at 451 per Megaw LJ).
   In this context, the defendants submitted that all owners of property suffered a loss of value when the market fell. They asked the hypothetical question-what would the plaintiffs have done with their money if they had not bought the shop? If they are compensated for the fall in value of the shop, are they not being361 compensated for a loss which they would have suffered even if the defendants had not been at fault, and therefore being over-compensated?
   I consider that the appropriate way to give effect to these legitimate concerns is to compare the loss consequent upon entering into the transaction with what would have been the position had the represented, or supposed, state of affairs actually existed. Assume that there had been no tort because the represented, or supposed, facts were true: if on this hypothesis the claimant would have been no better off than in fact he was, this will suggest that the proposed award will lead to an overcompensation. This check does not have the purpose of substituting some different (and erroneously contractual) criterion for the assessment of damages. Its purpose is to test the acceptability of the factual conclusion that the assessed consequential loss was truly consequential upon the fault for which the other party is liable and to recognise the fundamental principle of indemnity. Also, in carrying out the check, it is always necessary to remember that one effect of the tort may have been to expose the loser to a risk which he should not be required to bear, for example, because he was only exposed to that risk through the other person's wrong, or was misled about facts relevant to that risk, or was handicapped in the proper assessment of the risk, or in taking steps to avoid or limit the risk.
   In the present case, the represented position was that the business had an annual turnover of £110,000, a gross profit percentage of 31% and accordingly an annual gross profit of £34,000. If this had been correct, there would have been no difficulty in covering the financing charges and there would have been no need to write off the £20,000 attributable to goodwill, nor to discount in any way the bookshop fittings. Similarly, to compare £20,000 annual gross profits with the represented figure leaves a shortfall of about £14,000 pa. Over a period of 18 months, this gives a shortfall of £21,000. The figure thus arrived at is in excess of £40,000 down to January 1990. But, if the position had been as represented, the plaintiffs would not have needed to sell and could have carried on the business even with some erosion of their turnover and profits. They would have started from a higher baseline. They would not have had the same problem of covering their financing charges. It is possible to do a number of projections. They all show a similar picture confirming the fact that the plaintiffs will not have been overcompensated by an assessment made on a no-transaction basis. £44,000 will not represent any windfall to them. It does not put them in a better position than that they were led to believe.
   Therefore, accepting the qualification that it is necessary to check that the damages assessed are not more than an indemnity for losses in fact suffered, the plaintiffs are still found to have suffered a loss which they would not have suffered if the defendants had committed no tort.

Conclusion
   It follows that the plaintiffs' appeal against both defendants should be allowed. No distinction is to be made as between the plaintiffs and either of the defendants. The plaintiffs have proved that the torts of both of the defendants have caused them loss and that their loss is substantial. The plaintiffs' loss must be assessed as at March 1990 when they had an informed opportunity to sell at £76,000. Their recoverable damages are accordingly £44,000. Judgment should be entered for the plaintiffs against each of the defendants for that sum of damages. We should hear counsel on interest if this has not been agreed.

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The contribution proceedings
   Each of the defendants claimed contribution from the other under the Civil Liability (Contribution) Act 1978 in respect of any liability either might be under to the plaintiffs. The judge did not find that either of the defendants was liable in damages to the plaintiffs. However, at the conclusion of his judgment he expressed the view that if there had been such liability, he would have apportioned their responsibility for the plaintiffs' loss equally.
   The assessment of the contribution is covered by s 2(1) of the Act, which provides that-

   The second defendants submit that the judge failed to assess the contributions correctly because he gave inadequate weight to the fact that Mr Chappell had been fraudulent whereas they had only been negligent. They accept that they must bear some proportion of the responsibility, but not as much as 50%. Mr Chappell had supplied figures to the second defendants which he knew to be false. It was Mr Chappell who benefited and succeeded in selling his business. A principal is under an obligation to indemnify his agent for liabilities he incurs in the performance of the agency (see Sheffield Corp v Barclay [1905] AC 392, [1904-7] All ER Rep 747). Mr Chappell expressly requested the second defendants to send the 24 May letter.
   I do not consider that this court should interfere with the assessment of the judge. Mr Chappell was fraudulent. He was very seriously at fault. However, it was not the statements he had made which induced the plaintiffs to buy. On the evidence, and as found by the judge, it was what was said in the letter of 24 May which induced the plaintiffs to contract. The plaintiffs required the confirmation of the second defendants. The letter written by the second defendants purported to give them that confirmation. The letter was written recklessly. It contained statements which the second defendants must have known they had no basis for. The second defendants are liable to the plaintiffs because of their own reckless negligence. Indeed, on a strict view, their lack of care was a breach of their duty to Mr Chappell as well.
   The extent of a person's responsibility involves both the degree of his fault and the degree to which it contributed to the damage in question. It is just and equitable to take into account both the seriousness of the respective parties' faults and their causative relevance. A more serious fault having less causative impact on the plaintiff's damage may represent an equivalent responsibility to a less serious fault which had a greater causative impact. The present case is such a case. The judge was entitled to decline to distinguish between the responsibility of the two defendants for the damage to the plaintiffs.
   The second defendants' appeal against the judge's apportionment should be dismissed.

ROCH LJ. I agree.

BUTLER-SLOSS LJ. I also agree.

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end of selection