Summary

The purchaser of a commercial unit successfully established fraudulent misrepresentation where the vendor had deliberately failed to disclose that the electricity supply to the unit came through another unit, whose owner was entitled to cut off the supply, and had also told the purchaser that a problem with the unit's drainage was being addressed. Both misrepresentations were made to progress the sale at the price already agreed.

Facts

The court had to determine liability in claims for fraudulent misrepresentation and breach of indemnity, and advise the parties' experts on the correct approach to assessing damages if liability was established.

The first claimant was a printing business owned by the second claimant. The first defendant was also a printing business, owned by the second and third defendants. The parties had entered into agreements under which the claimants purchased the first defendant's business, including its employees, and the leases of three commercial units from the defendants. Prior to the purchase agreements, there were concerns that one of the units was prone to flooding because of a drainage problem, but the defendants assured the claimants that the problem was being addressed. After the purchases, the claimants discovered that the drainage problem was still an issue, the electricity supply to the unit was routed via a unit belonging to a third party who was entitled to cut off the supply, and the capacity of the electricity was not sufficient to run their printing machines. They asserted that the defendants had fraudulently misrepresented all three issues to induce them to enter the purchase agreements at an inflated price, and they withheld the final instalment that was owed. The defendants complained that the claimants were exaggerating the issues, had overstretched their finances and were merely looking for a way out of the agreements. Regarding the breach of indemnity claim, the claimants had been sued by an employee of the first defendant after taking over the business and, having settled her claim, they believed the defendants were liable under the agreements to indemnify them against the settlement sum and the associated legal costs.

Held

Electricity supply representation - The second defendant had fraudulently misrepresented the status of the electricity supply to the unit by failing to disclose that the supply was routed via a third-party unit. That was a significant matter to the claimants and was an inducing cause of their agreement to purchase the first defendant's business. They would not have acted in the same way if the representation had not been made. It was more likely than not that they would have investigated the cost of securing an electricity supply for the unit and looked to negotiate a reduction in the price of the overall deal. In addition, if the representation had not been made, the claimants would have been prompted to investigate the electricity supply to the unit, potentially leading to the discovery that the existing supply was inadequate for their needs (see paras 51-56, 59 of judgment).

Electricity capacity representation - There had been no fraudulent misrepresentation concerning the capacity of the electricity in the unit. The second defendant had made no express or implied representation as to whether the electricity supply was capable of serving the claimants' digital printing machines. In any event, it would have been entirely unreasonable for the claimants to have relied on any such implied representation: it would have been a matter for their own investigations and inquiries. Nor was there any negligent misrepresentation in terms of capacity (paras 64-67).

Flooding representation - The second defendant had fraudulently misrepresented to the claimants that the underlying causes of the flooding problems affecting the unit had been identified and were being addressed. He misled them to progress the sale and knew they would rely on the representation. It was a matter of significance and an inducing cause of the claimants entering into the transaction at the time and on the terms that they did (paras 73-76).

Indemnity regarding the employee's claim - The first claimant was entitled to a contractual indemnity in respect of the settlement sum it had paid to the employee of the first defendant, and the associated legal costs, in relation to her claim (para.89).

Approach to loss and damage - In a claim for deceit, a defendant was obliged to make full reparation for all the damage directly flowing from the relevant transaction, Smith New Court Securities Ltd v Citibank NA [1997] A.C. 254 followed. However, damages had to be assessed on the basis that the claimant had acted reasonably to mitigate its loss on discovering the fraud, and they should not recover potential losses that they had fully appreciated and factored into the purchase price. Absent the electricity supply misrepresentation, the claimants might have discovered that the unit's existing supply was inadequate as well as at risk of being cut off. The correct approach to assessing damages should compensate them for the fact that the unit suffered from an inadequate power supply, but should not insulate them from potential commercial risks that they had appreciated and factored in to the purchase price, as that would overcompensate them for the consequences of the defendants' fraud (paras 103-104).

Judgment for claimants in part