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	England and Wales Court of Appeal (Civil Division) Decisions
You are here: BAILII >> Databases >> England and Wales Court of Appeal (Civil Division) Decisions >> East v Maurer [1990] EWCA Civ 6 (28 September 1990) URL: http://www.bailii.org/ew/cases/EWCA/Civ/1990/6.html Cite as: [1990] EWCA Civ 6, [1991] 2 All ER 733, [1991] 1 WLR 461

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IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
(HIS HONOUR JUDGE TUCKER Q.C.,
Sitting as a Deputy High Court Judge)

		Royal Courts of Justice
		28th September 1990

LORD JUSTICE MUSTILL: I have asked Lord Justice Beldam to deliver the first judgment on this appeal.

LORD JUSTICE BELDAM: Ever changing style and fashion makes the ability to attract and satisfy intending customers a particularly valuable asset in the proprietor of a ladies' hair styling salon. According to the evidence, it was an attribute possessed by the first defendant who, in 1979, owned two salons in Bournmouth which he carried on under the name of Roger de Paris. One of the salons was at 44 Haven Road, Canford Cliffs. It had only recently been opened under the managership of a Mr. Mole. The other salon, at 37 Exeter Road, was closer to the centre of the town. Canford Cliffs, as those who are familiar with the area will know, is an expensive and fashionable area in which to live and the need to keep up with fashion may be more pronounced there. But the salon at 37 Exeter Road was conveniently placed for hotel guests and was close to the central shopping area. It was also much longer established. The first defendant had, by 1979, been there, first as an employee and then as its proprietor since 1958.

The first defendant's experience in styling ladies' hair was cosmopolitan. From time to time he had worked in salons in Hamburg, in Stockholm, in Paris, in Lausanne and in Mayfair. He had also taken part in competitions at international level. According to witnesses he had a personality which reflected his experience and, as the judge found, he had built up at Exeter Road a very good business.

By 1979, he had decided to concentrate his efforts at a smaller and more exclusive salon, he had decided to sell his Exeter Road business and to devote all his energies to Canford Cliffs. The plaintiffs bought the business at Exeter Road from him in September 1979. The second plaintiff/ Mrs. East/ intended to continue the business, but under the style and name of "Xellance". The second plaintiff herself had had considerable experience as a ladies' hairdresser and stylist, but it was of a more restricted character. She had run, successfully, several businesses in outlying districts of Oxford, Iffley and Kennington, but she and her husband wanted to have a business in the Bournemout area and so, for £20000, they bought the salon at Exeter Road from the first defendant and his company, the second defendant.

In the course of the negotiations for the sale they learned that the first defendant had another salon at Canford Cliffs, but he deliberately and completely misled the plaintiffs about his intentions. He told them falsely that he had no intention of working at the Canford Cliffs salon unless, for example a staff emergency arose due to illness or for some other reason. He told them that he intended to open a salon abroad, probably in Switzerland. Such an intention obviously meant that his valuable personal contact with the clienteleat Exeter Road could not follow him to the Continent and would probably not follow him to the Canford Cliffs salon because he would not be working there. His representations would obviously play a most significant part in inducing the plaintiffs to buy the salon, and so the learned judge held. He found that the representations were false to the first defendant's knowledge, and held that the plaintiffs were entitled to damages. On this aspect of the case there is no appeal against his finding.

Mrs. East started to run the salon on 1st September 1979. It was not long before it was apparent to her/ and to others who were working in the salon, that the level of business was falling away at an alarming rate. In due course she learned that the first defendant was working full time at his Canford Cliffs salon.

For just over three years Mrs. East tried to make the salon profitable. In her attempts she spent considerable sums on advertising; she installed a solarium bed and eventually began to combine the hairdressing business with a boutique.

During this period she made several attempts to sell the business and eventually, on 6th February 1989 she succeeded in selling the lease of the premises for £7,500. The learned judge found that the plaintiffs had behaved reasonably throughout; that they could not have sold the business before they actually did. He awarded them damages totalling £33,328; interest on the sums awarded brought the total award to £55,205.

His award was made up in this way. Firstly, he took the capital expenditure by taking the cost price of the business, £20000, and deducting from it the amount realised on the sale, thus arriving at the figure of £12,500. Secondly, he awarded the plaintiffs the fees and expenses incurred by them in buying and selling the business, and in carrying out improvements in an attempt to make it profitable. The figures awarded there amounted in total to £2,390. Next, he awarded trading losses incurred during the 3^ years during which the plaintiffs attempted to run the business. Those amounted to £2,438.

The next head of damages he awarded has led the defendants to appeal to this court against the amount of the damages. In addition to the sums already mentioned, he awarded the plaintiffs loss of profits during the 3i year period arriving at a figure of £15,000. Finally he awarded the figure of £l,000 as general damages for disappointment and inconvenience of the plaintiffs in their attempt to establish this business. It is against the award of £15,000 for loss of profit that the defendants now appeal.

Mr. Shawcross, for the appellants, submits that there is a difference in the manner in which damages are assessed for breach of contract and for the tort of deceit^ He says that the authorities show that no damages at all are recoverable for loss of profits in an action of deceit. Although there is no express decision which states that to be the case, in no case which has dealt with the proper measure of damage in an action of deceit, has there been an award for loss of profits, although one would have expected to see one. He concedes that if his submission in this regard is correct there would have to be a compensatory factor, for the learned judge only awarded interest on the capital expended from 2nd February 1983, when the plaintiffs ceased to carry on the business and sold it. So Mr. Shawcross concedes that if his submission is right, the plaintiff would be entitled to interest on the award for that 3¼ year period. Finally, he submits that even if damages for loss of profit are recoverable, the learned judge assessed the figure at too high a level, and on an incorrect basis. That the measure of damages for the tort of deceit and for breach of contract are different, no longer needs support from -authority. Damages for deceit are not awarded on the basis that the plaintiff is to be put in as good a position as if the statement had been true; they are to be assessed on a basis which would compensate the plaintiff for all the loss he has suffered, so far as money can do it.

This was confirmed in the case of Doyle v. Olby (Ironmongers) Limited, to which both the learned judge and this court were referred; it is reported in [1969] Q.B. Reports at page 158 and was a case in which the facts were similar to those of the present case.

In the course of his judgment Lord Denning M.R. said at page 166:

"The second question is what is the proper measure of damages for fraud, as distinct from damages for breach of contract. It was discussed during the argument in Hadley v. Baxendale (1854) 9 Ex 341), and finds a place in the notes to Smith's Leading Cases, 13th ed. (1929) at p. 563, where it is suggested there is no difference. But in McConnel v. Wright [1903] 1 Ch 546, 554, Lord Collins M.R. pointed out the difference. It was an action for fraudulent statements in a prospectus whereby a man was induced to take up shares. Lord Collins said of the action for fraud:

'It is not an action for breach of contract, and, therefore, no damages in respect of prospective gains which the person contracting was entitled by his contract to expect to come in, but it is an action of tort - it is an action for a wrong done whereby the plaintiff was tricked out of certain money in his pocket, and, therefore, prima facie, the highest limit of his damages is the whole extent of his loss, and that loss is measured by the money which was in his pocket and is now in the pocket of the company.'

But that statement was the subject of comment by Lord Atkin in Clark v. Urguhart [1930] A.C.28, 67-68. He said:

'I find it difficult to suppose that there is any difference in the measure of damages in an action of deceit depending upon the nature of the transaction into which the plaintiff is fraudulently induced to enter. Whether he buys shares or buys sugar, whether he subscribes for shares, or agrees to enter into a partnership, or in any other way alters his position to his detriment, in principle, the measure of damages should be the same, and whether estimated by a jury or a judge. I should have thought it would be based on the actual damage directly flowing from the fraudulent inducement. The formula in McConnel v. Wright [1903] 1 Ch 546 may be correct or it may be expressed in too rigid terms.'

I think that Lord Collins did express himself in too rigid terms. He seems to have overlooked consequential damages. On principle the distinction seems to be this: in contract the defendant has made a promise and broken it. The object of damages is to put the plaintiff in as good a position, as far as money can do it, as if the promise had been performed. In fraud, the defendant has been guilty of a deliberate wrong by inducing the plaintiff to act to his detriment. The object of damages is to compensate the plaintiff for all the loss he has suffered, so far, again, as money can do it. In contract, the damages are limited to what may reasonably be supposed to have been in the contemplation of the parties. In fraud, they are not so limited. The defendant is bound to make reparation for all the actual damages directly flowing from the fraudulent inducement. The person who has been defrauded is entitled to say:

'I would not have entered into this bargain at all but for your representation. Owing to your fraud, I have not only lost all the money I paid you, but what is more, I have been put to a large amount of extra expense as well and suffered this or that extra damages.'

All such damages can be recovered: and it does not lie in the mouth of the fraudulent person to say that they could not reasonably have been foreseen. For instance, in this very case, Mr. Doyle has not only lost the money which he paid for the business, which he would never have done if there had been no fraud; he put all that money in and lost it; but also he has been put to expense and loss in trying to run a business which has turned out to be a disaster for him. He is entitled to damages for all his loss, subject, of course to giving credit for any benefit that he has received. There is nothing to be taken off in mitigation; for there is nothing more that he could have done to reduce his loss. He did all that he could reasonably be expected to do."

In the present case it seems to me that the difference can be put in this way. The first defendant did not warrant to the plaintiffs that all the customers with whom he had a professional rapport would remain customers of the salon at Exeter Road. He represented that he would not be continuing to practise as a stylist in the immediate area.

The observations of Lord Denning, to which I have referred, are supported by an earlier judgment of Dixon J., as he then was, in the case of Toteff v. Antonas [1952] 87 Commonwealth Law Reports, a decision of the High Court of Australia. In that case, at page 650, Dixon J. said:

"In an action of deceit a plaintiff is entitled to recover as damages a sum representing the prejudice or disadvantage he has suffered in consequence of his altering his position under the inducement of the fraudulent misrepresentations made by the defendant. When what he has been induced to do is to make a purchase from the defendant and part with his money to him in payment of the price, then, if the transaction stands and is not disaffirmed or rescinded what is recoverable is 'the difference between the real value of the property, and the sum which the plaintiff was induced to give for it' per Abbott L.C.J. Pearson v. Wheeler. As Sir James Hannen P. in Peek v. Perry pointed out, the question is how much worse off is the plaintiff than if he had not entered into the transaction. If he had not done so he would have had the purchase money in his pocket. To ascertain his loss you must deduct from the amount he paid the real value of the thing he got. It may be objected that the point of the application of this doctrine lies in identifying 'the transaction' and that what Mayo J. has done is to identify it as the purchase of the goodwill and that only. But what is meant is the transaction into which the representation induced the plaintiff to enter. The measure of damages in an action of deceit consists in the loss or expenditure incurred by the plaintiff in consequence of the inducement on which he relied diminished by the corresponding advantage in money or moneys worth obtained by him on the other side: Potts v. Miller. You look to what he has been induced to part with as the initial step. He is entitled to say that but for the fraud he would never have parted with his money; per Coleridge L.C.J. Twycross v. Grant. But he cannot recover the entire price he has paid unless the thing prove wholly worthless. If the thing has any appreciable value the damages must be reduced pro tanto: per Cockburn L.C.J., Twycross v. Grant. It must not be forgotten that after all deceit is an action on the case for special damages incurred in consequence of the defendant's fraudulent inducement."

Mr. Shawcross has pointed out that both in the case of Doyle v. Olby and in the case of Toteff v. Antonas, none of the judgments referred to loss of profit as a recoverable head of damage; it may well be that the facts of each of those cases and the period involved before the claims were made, may not have made loss of profit a considerable head of damage. But as to the statements of principle to which I have referred/ it seems to me clear that there is no basis upon which one could say that loss of profits incurred whilst waiting for an opportunity to realise to its best advantage a business which has been purchased, are irrecoverable. It is conceded that losses made in the course of running the business of a company, are recoverable. If in fact the plaintiffs lost the profit which they could reasonably have expected from running a business in the area of a kind similar to the business in this case, I can see no reason why those do not fall within the words of Lord Atkin in Clark v. Urquhart, "actual damage directly flowing from the fraudulent inducement".

So I consider that on the facts found by the learned judge in the present case, the plaintiffs did establish that they had suffered a loss due to the defendants' misrepresentation which arose from their inability to earn the profits in the business which they hoped to buy in the Bournemouth area.

I would therefore reject the submission of Mr. Shawcross that loss of profits is not a recoverable head of damage in cases of this kind.

However, I am not satisfied that in arriving at the figure of £15,000 the learned judge approached the quantification of those damages on the correct basis. It seems to me that he was inclined to base his award on an assessment of the profits which the business actually bought by the plaintiffs might have made if the statement made by the first defendant had amounted to a warranty that customers would continue to patronise the salon in Exeter Road; further, that he left out of account a number of significant factors. What he did was to found his award on an evaluation which he made of the profits of the business at Exeter Road made by the first defendant in the year preceding the purchase of the business by the plaintiffs. Basing himself on figures which had been given to him by an accountant, and making an allowance for inflation he arrived at a figure for the profits which might have been made if the first defendant had continued to run the business at Exeter Road during the 3¼ years. He then made an allowance, only for the fact that the second plaintiff's experience in hair styling and hairdressing was not as extensive or as cosmopolitan as that of the first defendant. Thus he based his award on an assessment of what the profits would have been, less a deduction of 25% for the second plaintiff's lack of experience.

It seems to me that he should have begun by considering the kind of profit which the second plaintiff might have made if the representation which induced her to buy the business at Exeter Road had not been made, and that involved considering the kind of profits which she might have expected to make in another hairdressing business bought for a similar sum. Mr. Nicholson has argued that on the evidence of Mr. Knowles, an experienced accountant, the learned judge could have arrived at the same or an equivalent figure on that basis. I do not agree. The learned judge left out of account the fact that the second plaintiff was moving into an entirely different area and one in which she was, comparatively speaking, a stranger. Secondly, that she was going to deal with a different clientele. Thirdly, that there were almost certainly in that area of Bournemouth other smart hairdressing salons which represented competition and which, in any event, if the first defendant had, as he had represented, gone to open a salon on the Continent, could have attracted the custom of his former clients.

The learned judge, as Mr. Nicholson has pointed out, had two clear starting points. First, that any person investing £20,000 in a business would expect a greater return than if the sum was left safely in the bank or in a building society earning interest, and a reasonable figure for that at the rates then prevailing would have been at least £6,000. Secondly, he says that the salary of a hairdresser's assistant in the usual kind of establishment was at this time £40 per week and that the assistant could expect tips in addition. That would produce a figure of over £7,000, but the proprietor of a salon would clearly expect to earn more, having risked his money in the business. It seems to me that those are valid points from which -to start to consider what would be a reasonable sum to award for loss of profits of a business of this kind. As was pointed out by Winn L.J., in the case of Doyle v. Olby, this is not a question which can be considered on a mathematical basis. It has to be considered essentially, in the round, making what he described as a "jury assessment".

Taking all the factors into account, I think that the learned judges figure was too high; for my part I would have awarded a figure of £10,000 for that head of damage, and to this extent I would allow the appeal.

LORD JUSTICE BUTLER-SLOSS: For the reasons given in the judgment of Beldam L.J. I agree that the appeal should be allowed to the limited extent which he has set out.

LORD JUSTICE MUSTILL: I also agree.

In my judgment the best course in a case of this kind is to begin by comparing the position of the plaintiff as it would have been if the act complained of had not taken place with the position of the plaintiff as it actually became. This establishes the actual loss which the plaintiff has suffered and often helps to avoid the pitfalls of double counting, omissions and impermissible awards of both a capital and an income element in respect of the same loss: see Cullinane v. British 'Rema" Manufacturing Co. Ltd., [1954] 1 Q.B. 292, although even then mistakes are sometimes hard to avoid.

It is only when this exercise is complete that attention can be given to whether on grounds of principle some items must be omitted or, exceptionally, added. In the present case the act complained of is the making of the fraudulent representation, coupled with the reliance placed upon it by the plaintiffs in concluding the bargain. If this had not happened the plaintiffs would, on the judge's findings, have sold the Oxford business and bought a new business in Bournemouth, albeit not the one in Exeter Road. Thus, by the time the writ was issued they would have had the capital asset constituted by the new business, plus the profits made by that new business in the intervening period. One may assume the value of this capital asset to be the same as the value which the plaintiffs placed on the Exeter Road business, namely £20,000. In the event, the plaintiffs' position is that they have no business; they are out of pocket in respect of the legal fees, improvements and accumulated losses on Exeter Road, and they are in pocket to the extent of £7,500 made on the realisation of the premises. If one then subtracts the one from the other, the plaintiffs' loss is shown to be £20,000 minus £7,500, namely £12,500, plus accumulated losses and resale expenditures and the profits which would have been derived from the putative new Bournemouth business. This is what the judge has in fact awarded.

It is objected that the loss of profits is not properly recoverable because it is appropriate not to a claim in fraud but to a claim based on a contractual warranty of profits, for in such a case the loss of profits does not stem from the making of the contract but from the fact that the profit made was not what was anticipated.

I should have thought this argument sound if the judge had included an item for loss of the Exeter Road profits; but he has not done so. The loss of profits awarded relates to the hypothetical profitable business in which the plaintiffs would have engaged but for buying the Exeter Road business, and the profits of the latter are treated by the judge solely as some evidence of what the profits of the other business might have been. In my judgment there is no error of principle here.

As to the second issue in the case, relating to the quantification of the loss of profits of the putative new business, I have nothing to add to what has been said by my Lord , and I too would allow this appeal to the limited extent which he has proposed.

(Order: Appeal allowed to extent indicated in judgment of Beldam L.J.; appellant to have half costs of appeal, not to be enforced without leave; sum in court and interest thereon to be paid out to respondents' solicitors; liberty to apply, both sides).