Background
First instance decision
Appeal


In Eco 3 Capital Ltd v Ludsin Overseas Ltd(1) the Court of Appeal confirmed that there is no separate, standalone requirement to prove an intention to deceive in order for a defendant to be liable under the tort of deceit.

Background

The appellants in this case were two companies (Eco and Wharf) and three directors of those companies (Dr Shadrin and Mr Balfour of Eco and Mr Maggs of Wharf). The respondent company (Ludsin) is owned by Mr Lisitsin.

The appellants were involved in a property scheme to develop a site near Reading, which came to fruition in June and July 2005. Maggs found the site in June 2005 and saw the potential to make a quick profit. The potential was in the resale of the site after making improvements to the planning permission. In order to make the project viable, Maggs required substantial capital. He discussed the project with Balfour, who was to assist with the fundraising. In sourcing capital for the project, Balfour contacted Shadrin, a fellow director at Eco. Shadrin had close connections with Lisitsin and thought that Lisitsin might be interested in the scheme. On July 12 2005 Shadrin set out the scheme to Lisitsin as a low-risk, high-reward investment.

At a meeting between Balfour, Maggs and the scheme's solicitors attended by Shadrin, Maggs explained his vision for the scheme and the funding requirements. The scheme involved two deals. The first was for a company controlled by Maggs, Balfour and Wharf to purchase the site for approximately £9.5 million, and then to apply for enhanced planning permissions. The site was then to be sold to a second company, also controlled by Maggs, Balfour and Wharf, for £12.25 million. The turn on the deals was to be distributed as Maggs and Balfour decided; it was never intended that the distribution would include Lisitsin. Any profit over the £12.25 million would include a distribution to Ludsin.

Shadrin did not inform Lisitsin of these arrangements. He was told that the purchase price would be £12.5 million. As a result of the discussions between Shadrin and Lisitsin, in August 2005 Ludsin invested £2 million in the property scheme on behalf of Lisitsin in the belief that the funds were being used to purchase the site for £12.5 million, not £9.3 million or £12.25 million, as was known by Shadrin.

Due to delays and issues with the planning permissions, in 2009 the scheme failed and Ludsin lost its entire £2 million investment.

Ludsin issued proceedings in January 2010 for fraudulent misrepresentation. There were also subsidiary claims for a breach of fiduciary duty and breach of contract.

First instance decision

In relation to the claim for fraudulent misrepresentation, the judge's findings were that Shadrin had made the representations to Lisitsin:

  • in the knowledge that those representations were untrue;
  • with the intention that Lisitsin should rely upon them; and
  • in the knowledge that Lisitsin acted in reliance on the untrue representations.

Lisitsin would not have caused Ludsin to invest in the scheme had he known the true position. Shadrin and Eco were found liable to Ludsin for fraudulent misrepresentation.

Shadrin and Eco were found to be acting as agents for Maggs, Balfour and Wharf at the material time. Maggs and Balfour acted dishonestly in hiding the true nature of the scheme from Lisitsin. Maggs, Balfour and Wharf were found to be jointly and severally liable to Ludsin for deceit, together with Shadrin and Eco.

Appeal

On appeal, one issue concerned the tort of deceit and the ground of appeal was that the judge did not correctly identify or address the necessary ingredients of the tort.

The appellants relied on Derry v Peek,(2) Nocton v Lord Ashburton(3) and Armstrong v Strain,(4) arguing that the tort of deceit requires an intention to deceive, and that the judge had failed to identify such an element.

Dismissing the appellants' argument on this point, the judges held that the tort of deceit contains four ingredients:

"(i) The defendant makes a false representation to the claimant.

(ii) The defendant knows that the representation is false, alternatively he is reckless as to whether it is true or false.

(iii) The defendant intends that the claimant should act in reliance on it.

(iv) The claimant does act in reliance on the representation and in consequence suffers loss.

Ingredient (i) describes what the defendant does. Ingredients (ii) and (iii) describe the defendant's state of mind. Ingredient (iv) describes what the claimant does."

It was not accepted that the authorities cited led to the conclusion that there is a separate, standalone ingredient of the tort of deceit being an intention to deceive. Rather, it was held that ingredients (ii) and (iii), taken together, are the relevant mental elements which, if established, are sufficient to show an intention to deceive.

There had been no express finding by the judge at first instance that there was an intention to deceive, but this is not a prerequisite to finding a defendant liable for the tort of deceit. Whether characterising the defendant's conduct as fraudulent misrepresentation or deceit, a defendant will be liable as long as the four ingredients are satisfied.

For further information on this topic please contact Gareth Hoodless at RPC by telephone (+44 20 3060 6000), fax (+44 20 3060 7000) or email (gareth.hoodless@rpc.co.uk).

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Endnotes

(1) [2013] EWCA Civ 413 (April 23 2013).

(2) (1889) 14 App Cas 337.

(3) [1914] AC 932.

(4) [1952] 1 KB 232.