Court of Appeal rejects new argument that victims of fraud should credit the “time value” of money received in a fraudulent transaction
In an action brought by the victim of fraud against the perpetrator, seeking damages for the consequent loss of investment opportunities in connection with certain fraudulent transactions, the Court of Appeal dismissed a Fraudster’s appeal on the basis that the victim was obligated to credit not only the money they received in connection with the fraudulent transactions, but also the “time value” of that money between the transaction and the trial: Tuke vs. Hood  EWCA Civil 23.
This decision will be notable to financial institutions for the Court of Appeals’ analysis of the proper calculation of damages in deception claims, particularly in the context of misuse litigation, shareholder claims and growing number of fraud claims arising from Covid-19. pandemic. The Court of Appeal concluded that when the measure of damages is reflected by comparing the value of what was sold with the value of what was received, the innocent party must simply give credit for the money (or the value money) that she received as part of the transaction itself, in order to reflect the situation as it would have been if the fraud had not occurred.
The Court of Appeal referred to the classic modern statement of principles applicable when assessing damages for deception in Smith New Court Ltd v Scrimgeour Vickers  CA 254. New Smith Yard confirmed that the time at which credit should be given for benefits received by the innocent party is normally the date of the fraudulently induced transaction (although this is not an inflexible rule and a different date may be adopted if one takes the date of the transaction would under-compensate the victim). The Court of Appeal noted that New Smith Yard said nothing about the innocent party having to attribute the benefits received to the claims for consequential losses.
The suggestion in this case that unless the victim gave credit for the time value of the money received, they would be overcompensated, was novel. The Court of Appeal found it fundamentally wrong and unprincipled. In the court’s view, a plaintiff would not be fully compensated if required to give credit for the time value of the money received.
We examine the decision in more detail below.
Between 2009 and 2012, the claimant, Mr Tuke, purchased a number of classic cars as an investment from or through a specialist classic car dealer, JD Classics Ltd (JDC), which was founded and run by the defendant, Mr. Hood.
In 2011, at the suggestion of Mr Hood, Mr Tuke completed a deal which required him to borrow £8m from a finance company to buy 5 Jaguar racing cars for £10m. It later transpired that Mr. Hood had tricked Mr. Tuke into buying the cars for far more than they were worth, after providing Mr. Tuke with false appraisals. In order to repay the loan from the finance company, Mr Tuke was forced to sell a number of his classic cars and was enticed to sell all but one to JDC at an undervalued price.
Mr. Tuke later sued Mr. Hood for deception, dishonest assistance in breach of fiduciary duty, knowing receipt and conversion. Mr. Tuke sought damages, including for loss of investment opportunity. Mr. Tuke’s case was that if he had not been defrauded, he would have sought to retain certain cars which would have increased in value considerably.
High Court decision
The High Court found that Mr Hood had cheated on Mr Tuke on numerous occasions over many years, in gross breach of the trust that had been placed in him. The High Court found Mr Hood liable for both deception and dishonest assistance in JDC’s breach of trust in relation to a number of transactions. The High Court also said that but for the fraud, Mr Tuke could have kept many cars until 2020 or at least until 2015/2016, by which time the market had grown significantly.
The High Court quantified ‘basic claims’ for loss suffered on sales at undervaluation in the normal way, comparing the market value of the cars at the date of sale to the actual value of the consideration received for they.
With regard to the claim for consequential loss of investment opportunity, the High Court compared the market value of each car with its 2020 value, which reflected the subsequent increase in the value of the investment, before deciding apply a 25% discount for uncertainties.
Mr Hood appealed against the High Court’s decision. Mr Hood argued that the High Court, when assessing the loss of investment opportunity, should have taken into account the notional benefit that Mr Tuke received over time from the cash element of the consideration he received for the investment cars and that this resulted in Mr Tuke being overcompensated.
Court of Appeal Decision
The Court of Appeal found in favor of Mr. Tuke and dismissed Mr. Hood’s appeal.
The main issues that will be of interest to financial institutions are presented below.
Legal principles on the calculation of damages for deception
The Court of Appeal noted that the purpose of an award of damages for deception is to put the plaintiff in the position he would have been in if no dishonest representation had been made to him.
The Court of Appeal went on to highlight the following key legal principles relating to the assessment of damages for deception:
- When assessing damages, the plaintiff must take into account all the benefits he received as a result of the transaction. The time at which credit should be given for benefits is normally the date of the fraudulently induced transaction, but this is not an inflexible rule (according to New Smith Yard).
- A defendant wishing to assert that events subsequent to the breach reduced a recoverable loss must plead and prove it (according to OMV Petrom SA v Glencore International AG (Rev 1)  EWCA Civil 778).
Application of the legal principles on the calculation of damages for deception to this case
The Court of Appeal held that whatever the innocent party is required to do, in order to reflect the situation as it would have been if the deception had not taken place, in a case where the extent of the damages is reflected comparing the value of what was sold with the value of what was received, is to credit the money (or money value) he received as part of the transaction itself.
The Court of Appeal held that Mr. Hood should not be rewarded for his dishonest behavior by reducing his liability, especially if it would result in Mr. Tuke not receiving the full value of the loss. Requiring Mr. Tuke to give credit for the hypothetical “time value” of the money he received from JDC in the relevant transactions would result in him not receiving full credit for the lost opportunity. of investment. This would be directly contrary to the policy of seeking to award the innocent party full compensation for the harm suffered in cases of dishonesty.
The Court of Appeal observed that in this case, but for the fraudulent misrepresentations of Mr. Hood, Mr. Tuke would not have taken out the loan and he would not have had to sell all his investment cars except one to repay the loan. Further, Mr. Hood had not pleaded or proven that post-breach events had reduced a recoverable loss.
The Court of Appeal noted that New Smith Yard said nothing about the innocent party having to attribute the benefits received to the claims for consequential losses. Once the value of the cash benefit received by Mr. Tuke when he sold the cars was taken into account in the basic calculation of the loss, there was no reason to consider its value over time. There was also no reason to consider the “time value” of the cash benefit when assessing the additional loss of the opportunity to realize a capital gain by keeping the cars rather than by selling them.
Further, the Court of Appeal stated that, in principle, a plaintiff is only required to credit a benefit that arises from a transaction and is intrinsic to it. What Mr. Tuke did, or could have done, with the money he received for the cars was irrelevant. Any gain or loss would result from Mr. Tuke’s independent actions and decisions. The time value of the money received was not sufficiently related to the fraudulent transactions and was not a benefit received in connection with these transactions. In any event, the loss of investment opportunities was not time-lapse compensation as such, but a claim for the loss of capital appreciation of the cars.
The Court of Appeal also noted that Mr. Hood’s analogy to interest awards was deeply flawed. Mr. Hood had argued that “time value” should be calculated either in the same way that Mr. Tuke had received compound interest on fair compensation for Mr. Hood’s dishonest assistance in breach of fiduciary duty. of JDC, or in the same manner as discretionary interest under the law. First, the claim for loss of investment opportunity was an alternative to a claim for interest on the basic damages awarded. Second, the discretionary award of debt interest or damages under section 35A of the Superior Courts Act 1981 is purely the creation of law. There is no discretion at common law to award such compensation to a plaintiff for the loss of use of money over time, if the claim is not a claim for “debt or damages within the meaning of Article 35A (in accordance with Odyssey Aviation Ltd v GFG 373 Ltd  EWHC 1980). Third, if interest is claimed at common law as damages for the subsequent payment of a debt, the actual losses must be pleaded and proven (according to Sempra Metals Ltd v Inland Revenue Commissioners and another  UKHL 34). The Court of Appeal found it difficult to see how there could be any power to calculate the alleged “time value” of a receipt by the innocent party and credit it to the dishonest defendant, especially in a vacuum of evidence. The compound interest analogy was even harder to sustain, since compound interest is an equity reward designed to discourage dishonest behavior. There was no reason for the innocent victim of the fraud to be put on the same footing as the fraudster and treated as if they had received compound interest on any money they received under the fraudulent transaction.
Finally, the Court of Appeal stated that policy considerations strongly militated against requiring the aggrieved party to give credit for the notional time value of money. This would encourage the fraudster to lengthen the time between the fraudulent transaction and the award of damages, because the longer this time, the greater the credit. A fraudster should not be encouraged to prevaricate or cover up their wrongdoing.
Accordingly, for the above reasons, the Court of Appeal agreed with Mr. Tuke and dismissed Mr. Hood’s appeal.