Here’s a legal conundrum for you; If you bought a racehorse from a dealer who promised you it had been thoroughly vetted and was physically sound, but in fact the dealer knew it had a latent disease which could cause it to become lame, then it’s pretty obvious you would have been defrauded.  Let’s say you paid £1 million for the horse because you expected to earn a good return on that investment from race winnings, but its real value had the defect been disclosed was only £500,000.  Then in legal terms you would, on the face of it, be entitled to claim £500,000 in damages.  This is the difference between what you paid and what the horse was actually worth at the time you bought it.

Suppose, however, you didn’t find out about the deceit until after the horse had retired.  During that time, it had won the number of races you had expected and the latent disease had never materialised into actual lameness.  You haven’t suffered any financial loss.  Should you still be entitled to your £500,000 in damages?

This hypothetical example was quoted by one of the Judges in a 2014 case (Ageas (UK) Ltd v Kwik –Fit (GB) Ltd [2014] EWHC 2178 (QB)) where the Court was deciding whether an insurer should pay out the value of an insured loss at the date of the breach of contract (£12.7 million) rather than the amount which subsequently turned out to be the actual loss suffered by the insured party (£3.8 million).  In that case they decided that the insured was entitled to receive the larger amount.  This is because the overriding compensatory principle is that damages are to be assessed at the date of breach and that only events which have occurred at that date can be taken into account.  This principle should only be departed from in limited and fairly exceptional circumstances. 

A very recent Court of Appeal case reviewed this decision and others, when assessing what damages should be paid by Glencore (now Glencore PLC, the London Stock Exchange listed commodities business) to OMV Petron, a Romanian oil company.  It had already been established that Glencore had fraudulently supplied inferior quality blended crude oil to OMV over a number of years in the 1990s, passing this off as higher grade oil.  OMV had succeeded in a claim for deceit under English law against Glencore.  At issue was what measure of damages was payable by Glencore.  It is established law that the basic measure of damages for deceit in the case of sale of goods is the price paid less any benefits received as a result of the transaction.   

Glencore had tried to argue that OMV’s refining of the crude oil had produced yields similar to those it would have achieved if the crude had in fact been the higher grade oil which had been contracted for.   Therefore, said Glencore, the loss was mostly hypothetical and Glencore should not have to pay damages in these circumstances.  But the court said the onus was on Glencore as the party which had promoted the deceit, to plead and prove this point and they had not done so.  Having taken evidence from industry experts, the court decided that the market value of the inferior crude at the time it was sold was around 10% less than the price actually paid.  In the end, the ruling of the lower court was upheld and Glencore were held liable for damages amounting to $40 million. 

As well as clarifying this aspect of the law of deceit, it is interesting to note some of the comments made by the Court of Appeal in this judgment.   Perhaps unsurprisingly, it is clear that the English courts will tend to take a hard line against a party which has perpetrated a deceit.  Lord Justice Christopher Clarke was adamant that “the person duped should not suffer an injustice by failing to recover full compensation” .  In his judgment he made a point of underlining that the courts would uphold “a policy of discouraging intentional wrongdoing”.  Citing an 1880 case he said “when damage is done maliciously or with full knowledge that the person doing it was doing wrong you would say everything would be taken into view that would go most against the wilful wrongdoer" and finally, endorsing the method taken to value OMV’s loss by the lower courts, he stated that it “would ensure that Glencore retained no part of its fraudulently acquired profit”. 

OMV Petrom SA v Glencore International AG [2016] EWCA Civ 778 (21 July 2016)