The Court of Appeal recently held that a director who had made continuing fraudulent misrepresentations was liable for damages calculated at the point of sale and not at the point of entering into the contract.(1)

Facts

Between 2009 and 2011 Inter Export LLC, a Ukrainian company, sold edible oils to Nerida Trading Limited (NTL), a UK-registered company. Ms Lasytsya and her former husband, Mr Townley, were both directors and each 50% shareholders of NTL. Townley resigned as a director on 1 August 2010 while Lasytsya continued to run NTL until its liquidation in February 2016.

In July 2012, when a new contract for the sale of oil was in contemplation, Inter Export sought assurance from Lasytsya as to NTL's ability to pay for the proposed shipment. Inter Export's case at trial was that Lasytsya had made seven oral representations that NTL had sufficient funds to pay for the shipment.

On 21 September 2012 Inter Export agreed to sell NTL 1,000 metric tons of sunflower oil, with delivery to be made by mid-October 2012. Payment was to be made to FLASK LLC, the freight forwarder, within three banking days of delivery. Inter Export's evidence was that it would not have entered into the contract had Lasytsya not made the representations.

The oil was delivered to FLASK and loaded onto a vessel on or around 13 October 2012. Inter Export raised invoices and received Society for Worldwide Interbank Financial Telecommunication (SWIFT) messages stating that significant sums had been transferred. In fact, the messages had been forged. Inter Export did not receive notification that the messages had been forged in time to prevent shipment and accordingly lost title to the oil.

Inter Export never received payment for the oil. After NTL went into liquidation in February 2016, Inter Export issued proceedings against Lasytsya and Townley for damages in deceit as a result of the representations.

First-instance decision

At first instance, the judge concluded that Inter Export had not shown that Townley had anything to do with the transaction and he was therefore not liable.

In relation to Lasytsya, the judge held that on the balance of probabilities, she had forged the SWIFT documents, so as not to prevent the loading of the sunflower oil. The judge found that her representations had been false and that, but for those representations, Inter Export would not have entered into the contract. The judge also found that the representations were continuing ones, which imposed a responsibility on Lasytsya in respect of their accuracy up until the conclusion of the contract.

As to the measure of loss, the judge held that damages should be the market value of the sunflower oil obtained by Lasytsya as a result of the deceit, which was the sale price to NTL of $1.2 million.

Lasytsya appealed on the basis that:

  • the judge's factual findings were inadequate;
  • the judgment had not been adequately reasoned; and
  • the correct measure of loss was not the oil's market value but the cost of production – namely, the cost of buying the seeds and extracting oil from them.

Court of Appeal decision

The Court of Appeal dismissed Lasytsya's appeal in its entirety.

Factual findings To be successful on the first head of appeal, Lasytsya had to persuade the Court of Appeal that:

  • the first-instance judge had not found that the pleaded representations had been made; or
  • they were against the weight of evidence.

The Court of Appeal dismissed this ground. In its view, the judge at first instance had found, and had been entitled to find, that Lasytsya's representations had been made and were continuing, which imposed a continuing responsibility in respect of their accuracy, up until the conclusion of the contract. Indeed, it was difficult to see why Inter Export would have been eager to have reassurance as to payment unless that reassurance was to continue up until payment.

Reasoning The appeal judges acknowledged that the judgment at first instance was difficult to follow without external knowledge of the case and that while it was possible to deduce that the judge had diligently applied her mind to her duty to find facts according to evidence, it was not a judgment "whose structure of manner of expression met the standards normally expected of the High Court". Further, "the appellate courts should not have to go through a lengthy process of working out what a judgment was saying".(2) However, the key question was whether it was clear to the parties as to why they had won or lost. The critical issue had been that the judge at first instance preferred Inter Export's evidence to that of Lasytsya. The judge had made that conclusion with great thoroughness and care. The court was therefore not prepared to uphold the appeal on this ground.

Assessment of damages It was common ground that the correct measure of damages in deceit was an award putting the claimant in the position that it would have been in had the deceit not been perpetrated.(3) The parties disagreed as to how the test should be applied. Lasytsya argued that but for the deceit, Inter Export would not have bought and processed the sunflower seeds to create the oil. Therefore, Inter Export should be compensated only for that loss. Inter Export attempted to rely on SmithKline & French Laboratories Ltd v Long,(4) a case in which a drug manufacturer was deceived by a misrepresentation that its drugs would be sold in Africa (rather than, in truth, resold in the Netherlands) and was awarded the market value of the drugs. However, the Court of Appeal found that Smith Kline turned on a unique set of facts to the extent that no analogy could be drawn with the present appeal.

Declining to comment on the soundness of SmithKline, the Court of Appeal nevertheless held that, because Lasytsya's representations had been continuing ones, Inter Export's loss could be properly assessed as at the point of reliance (ie, when it had allowed the oil to be dispatched). At this point, Inter Export's loss was the market value of the oil.

Comment

This judgment is a reminder that, in the right case, deceit may be used to pierce the corporate veil. It also acts as a reminder of the considerations when assessing damages in relation to continuing representations, particularly when there is time between the representation being made and the performance of the contract. Finally, this case provides interesting judicial comment with regard to the structure and manner of judgments expected from the High Court.

For further information on this topic please contact Harriet Evans at RPC by telephone (+44 20 3060 6000) or email (harriet.evans@rpc.co.uk). The RPC website can be accessed at www.rpc.co.uk.

Endnotes

(1) Inter Export LLC v (1) Jonathan Townley (2) Yaroslavna Lasytsya [2018] EWCA Civ 2068.

(2) Inter Export LLC v (1) Jonathan Townley (2) Yaroslavna Lasytsya [2018] EWCA Civ 2068, paragraphs 56 and 57.

(3) Smith New Court Securities Ltd v Citibank NA [1997] AC 254.

(4) [1981] 1 WLR 1.

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