In a significant recent judgment in Tuke v Hood  EWCA Civ 23, the Court of Appeal faced the novel question of whether a victim of fraud who had been induced to sell appreciating assets at an undervalue was required to give credit for the increase in the value of the cash they had received in return. In rejecting that argument, the Court of Appeal emphasised that the fundamental aim of damages in fraud claims is to compensate the victim fully for all loss directly flowing from the fraudulent acts.
Damages – introduction and overview
The aim of damages for deceit is to put the claimant in the same position in which it would have been had the deceit not occurred. Thus, when assessing damages for deceit which induced the victim to enter into a sale and purchase transaction, the defendant will be liable for all loss flowing directly from the transaction, less any benefits which the claimant has received as a result of the transaction. In determining those benefits, the court will generally deduct the market value of the asset at the date it was acquired from the price paid by the innocent party.
This general rule, however, is not inflexible, and may be varied where its application would prevent a claimant from obtaining full compensation. Claimants may also recover consequential losses caused by the transaction, so long as they have taken all reasonable steps to mitigate their losses once they have discovered the fraud. For policy reasons, damages in deceit are not subject to the usual rules on remoteness of damage.
Mr Tuke was an investor in classic cars. Between 2009 and 2013, he had entered into a series of transactions via Mr Hood's dealership (initially acting as seller, and subsequently as Mr Tuke's agent) in relation to various high value vehicles. However, Mr Tuke subsequently brought proceedings against Mr Hood in relation to several of the transactions, contending that over the course of their dealings, Mr Hood had made numerous false representations which had induced him to enter into the transactions and caused him loss, and that Mr Hood had dishonestly assisted in breaches of the dealership's duties as Mr Tuke's agent.
One of the transactions complained of comprised the purchase of five Jaguar "Group C" racing cars (the "Group C transaction"). Mr Tuke complained that Mr Hood falsely represented that the Jaguars were owned by four individuals, had been valued at £10 million and described as a "bargain" by a valuer, and that Mr Hood considered that they were undervalued by £1.5 million. Mr Tuke asserted that in fact, the cars were worth a lot less, had not been independently valued, were all old stock belonging to the dealership, and Mr Hood had no honest belief that they were worth more.
Mr Tuke had taken out a loan to fund the Group C transaction, but the Jaguars provided insufficient collateral, and so he found it necessary to pledge a number of his other cars as security for the loan. He contended that this deprived him of cash flow, and left him with no other option but to sell nearly all of his most expensive cars via Mr Hood's dealership at an undervalue, usually in transactions involving the provision of overvalued cars in part-exchange. Mr Tuke contended that if he had not needed to sell to pay off the loan, he would have retained a number of those cars for investment purposes (the "investment cars"). Given a rise in the market for classic cars, he said he had missed out on a substantial increase in their value.
Judgment at First Instance
At first instance, Mr Justice Jacobs accepted that the representations made by Mr Hood were false and found Mr Hood liable for deceit and dishonest assistance in respect of eight transactions, and deceit alone in respect of a further two transactions. Mr Tuke was awarded:
- "Base damages" of £4.2m, calculated by reference to the difference in the market value of the cars at the date of sale, less the true value of the consideration Mr Tuke received in return; plus
- Damages for "loss of investment opportunity" of £6.9m in respect of the investment cars. This figure was calculated by comparing the value of each investment car in 2020 with its market value at the date of the sale, and then applying a 25% reduction to account for the uncertainty of what would have happened in a counterfactual world; and
- Interest, but only in respect of cars which Mr Tuke would not have retained, even if he could have paid off the loan (the "non-investment cars"), on the basis that the claim for the loss of investment opportunity was a true alternative to a claim for interest.
Mr Hood appealed, claiming that the Commercial Court should have required Mr Tuke to account for the benefit that he gained over time by receiving cash for the investment cars (the "time value" of the money), calculated in the same way as either compound or discretionary interest, and that by not doing so, Mr Tuke had been overcompensated.
Decision of the Court of Appeal
The Court of Appeal unanimously dismissed Mr Hood's appeal. In the leading judgment given by Lady Justice Andrews, with which Lord Justice Coulson and Lord Justice Baker agreed, the Court of Appeal made clear that, where damages for deceit are determined by comparing the value of what was sold with the value of what was received, the innocent party is only required to give credit for the money they received under the transaction itself, which accurately reflects the position as if the deceit had not occurred. The Court held, therefore, that no further credit had to be given for the increase in the "time value" of the money received under the fraudulent transaction between the date of the transaction and the date of trial.
In its reasoning, the Court emphasised that, if credit had to be given for the "time value" of cash received by an innocent party to a fraudulent transaction, then the longer the time period between the fraud and the trial, the less compensation the victim would receive, and in some cases their loss may be extinguished altogether. This would undoubtedly incentivise fraudsters to conceal their wrongdoing for longer with the aim of reducing recoverable damages and undercompensate the innocent party, contrary to the general principle that a victim of fraud should be compensated for all losses flowing from a fraudulent transaction. The Court was clear in its discouragement of such an approach.
The Court also reiterated the general principle in damages for deceit, that a claimant is only required to give credit for a benefit resulting from, and intrinsic to, a transaction. In this case, the "time value" of the cash received had insufficient nexus with the fraudulent transaction. What Mr Tuke did, or may have done, with the cash he received after he received it was irrelevant, as any gain or loss would not be a result of the transaction, but of his own independent acts and decisions. Further, the Court considered that the "time value" of cash was insufficiently tangible to qualify for a benefit for which credit had to be given, and measuring its value over time was not straightforward, particularly if it was accepted that the use to which it was put was irrelevant. In any event, to conduct such an assessment would require complex and speculative analysis – an exercise upon which the Court was not willing to embark.
The Court added that Mr Hood's analogy with awards of interest was fundamentally flawed. The Court observed that interest on a debt or damages pursuant to s.35A of the Senior Courts Act 1981 is the creation of statute, and there is no discretion at common law to award interest for loss of use of money over time. Instead actual loss must be pleaded and proven. Accordingly, the Court found it hard to see how there could be power to compute the "time value" of cash received by a victim and credit it to the defendant, especially in an evidential vacuum. As for compound interest, the Court noted this is an award in equity designed to deter dishonest behaviour, and commented that an innocent party should not be put on the same footing as a fraudster.
The Court of Appeal highlighted that Mr Hood's argument on appeal was a novel one. It was, in fact, first raised by Mr Justice Jacobs at first instance, who was concerned that if compound interest was to be awarded on losses suffered on the investment cars, an anomaly might arise if no commensurate allowance was made for interest on the cash received in the context of the loss of investment opportunity claim. Ultimately, the loss of investment opportunity claim was seen as an alternative to a claim for interest, so there was no award for interest which needed to be counterbalanced. In any event, as Lord Justice Coulson noted in a brief judgment agreeing with Lady Justice Andrews, Mr Hood's argument was "contrary to both principle and policy".
The decision in Tuke v Hood emphasises that fraudsters will face a considerable hurdle in seeking to reduce their liability to the victim of fraud. The rules on damages for deceit are aimed at ensuring that the victim receives full compensation. While some general principles (for example, relating to the date on which an asset is valued) might be applied more flexibly in the victim's favour, a fraudster cannot expect "tender presumptions", and must plead and prove any assertion that post-breach events have reduced a recoverable loss. It is perhaps unsurprising that the Court of Appeal was unsympathetic to Mr Hood in this case - he had not only deceived Mr Tuke on a large number of occasions over many years, he had also attempted to deceive the court at first instance by fabricating and backdating a letter as to the nature of the agency relationship between Mr Tuke and his dealership.