The Court of Appeal has held that a defrauded purchaser's damages should not be reduced on the basis that, as matters transpired, the purchaser was not as badly off as a result of the fraud as might have been expected as at the transaction date: OMV Petrom SA v Glencore International AG [2016] EWCA Civ 778.

The decision sheds light on when subsequent events will be taken into account in determining the extent of the defrauded party's loss, and the flexible approach that can be taken in favour of defrauded claimants. In particular, it suggests that the courts will be unwilling to take subsequent events into account where that would give the fraudster a windfall.

Background

The dispute arose out of the importation of varying grades of crude oil into Romania during the 1990s. Pursuant to a series of 32 supply contracts between 1993 and 1996, Glencore (and its predecessor, Marc Rich) was to provide Petrom with specified blends of Iranian Heavy and Gulf of Suez Mix (GOSM) ("the Stipulated Blends").

Glencore did not in fact provide the Stipulated Blends to Petrom. Instead, Glencore manufactured its own blends ("the Replacement Blends") at its facility in Israel. The Replacement Blends were designed to mimic the qualities of the Stipulated Blends, but in fact were comprised of cheaper crudes from Yemen, Egypt and Nigeria. These blends were bespoke and not replicated elsewhere. Glencore created a paper trail to support the initial deception, including fabricating bills of lading and certificates of conformity, all of which mis-labelled the Replacement Blend as either GOSM or Iranian Heavy.

High Court decision

After being alerted to the deception by a whistle-blower, Petrom brought proceedings against Glencore for deceit. Petrom claimed damages equivalent to the difference in value between the Stipulated Blends and the Replacement Blends (ie the price paid, less the value of the goods it obtained). The trial judge, Mr Justice Flaux held that Glencore was liable in deceit, describing its evidence as "mendacious and unbelievable".

In measuring Petrom's loss, Flaux J received expert evidence from both sides to determine the value of the Replacement Blends. The value included a discount to reflect that in buying a new, exotic or not recognised blend, a buyer would expect a discount due to the uncertainty as to how the blend would perform, the blend's composition and potential set up costs for the refining process. Flaux J applied a discount of $1 per barrel – between the $1.25 recommended by Petrom's expert and the $0.35-$0.50 recommended by Glencore's expert.

Court of Appeal decision

Glencore appealed in relation to quantum. Among other arguments, it sought to challenge the discount applied to the value of the Replacement Blends, principally on the basis that the risks which were said to justify the discount had not in fact materialised. Petrom had not suffered any damage as a result of using the Replacement Blends as opposed to the Stipulated Blends.

The Court of Appeal (Christopher Clarke, Black and Kitchin LJJ) unanimously upheld the High Court decision. Christopher Clarke LJ gave the leading judgment.

Calculation date: Smith New Court

Christopher Clarke LJ considered the leading authority on the measure of damages in fraud cases, the House of Lords decision in Smith New Court Securities Ltd v Scrimgeour Vickers (Asset Management) Ltd [1997] AC 254.

In Smith New Court, the claimant had purchased shares in Ferranti as a result of the fraudulent statement that there was considerable other interest in purchasing shares in Ferranti. The value of the Ferranti shares subsequently plummeted as a result of a separate unrelated fraud perpetrated on Ferranti. The House of Lords held that the claimants' recoverable loss was not to be measured at the purchase date of the shares, but later when the full loss, including the losses arising from the second fraud, was realised. In setting out the reasoning of the Court, Lord Browne-Wilkinson set out seven "principles applicable to assessing damages for fraud" or fraudulent misrepresentation. The third and fourth principles are of particular significance to the present decision:

"3. In assessing such damage, the plaintiff is entitled to recover by way of damages the full price paid by him, but he must give credit for any benefits which he has received as a result of the transaction;

4. As a general rule, the benefits received by him include the market value of the property acquired as at the date of acquisition; but such general rule is not to be inflexibly applied where to do so would prevent him obtaining full compensation for the wrong suffered" (emphasis added)

Smith New Court was a case where the rigid application of the rule as to valuation would have prevented the claimant from obtaining full compensation for the wrong suffered. At the date of the fraud, the Ferranti share value had not yet decreased as the second fraud remained undetected. It was only later when the second fraud was detected that the share value dropped. Therefore, in order to provide full compensation to the defrauded party, it was necessary to value the property acquired at the date of disposal rather than at the date of acquisition.

Calculation date: the present case

The Court of Appeal considered that the flexibility in approach demonstrated by Smith New Court was concerned with ensuring that the defrauded party received full compensation for its losses – and (unsurprisingly) was not designed to allow the fraudster to benefit from subsequent unrelated events.

Christopher Clarke LJ gave several reasons why Glencore's proposed approach was to be rejected, including:

  • It did not reflect the market value of the Replacement Blends at the date of acquisition;
  • It would mean, in effect, that Glencore had achieved a price for the sale of the Replacement Blends which it could not have achieved if it had been honest; and
  • Glencore had not adduced evidence that there were no damaging consequences of using the Replacement Blends. If Glencore sought to contend that action taken post breach reduced Petrom’s recoverable loss it was for it to plead and prove it.

Christopher Clarke LJ therefore upheld the discount to the value of the benefit of $1 per barrel.

Duty to mitigate

Counsel for Glencore had also sought to rely on Bacciottini v Gotelee and Goldsmith [2016] EWCA Civ 170 (see our blog post on the decision) for the proposition that subsequent events should be taken into consideration in the calculation of damages.

In Bacciottini, the purchasers of residential property sued a firm of solicitors who had failed to advise that a planning restriction was attached to the property. The purchasers then successfully obtained the removal of the restriction, at a cost of £250. Nevertheless, the purchasers sued the firm of solicitors for £100,000 representing the difference in value between the price paid for the property and the value of the property with the planning restriction.

At first instance, the trial judge awarded the purchasers £250. The purchasers had been under a duty to mitigate their loss and had done so. This decision was upheld by the Court of Appeal. The Court of Appeal decision took the view that the purchasers had suffered no loss (save for the £250 fee).

Glencore argued that this was no different to the present case, and that Petrom had received the Replacement Blends which had functioned just as well as the Stipulated Blends would have. Christopher Clarke LJ gave this argument short shrift. He distinguished Bacciottini for the following reasons:

  1. Bacciottini was not a fraud case.
  2. As the fraud had remained undetected for so long, there was no way for Petrom to mitigate its loss. "The normal measure of loss [for fraudulent misrepresentation] was singularly appropriate for a case where the buyer had paid too high a price on account of the seller's fraud".
  3. It was not, as argued by Glencore, illogical to award a deceived purchaser both the difference between contract and market price of the goods and consequential damages. In fact, Glencore's deceit directly caused both the overpayment for the goods and any damage to the refinery from processing a different blend to those Petrom believed it had received.