6.7.2.3 Measure of damages for negligent misrepresentation

Both the damages for negligent misrepresentation under common law and the damages for negligent misrepresentation under section 2(1) of the Misrepresentation Act 1967 are based on the same tortious measure of damages applicable to fraudulent misrepresentation. The claimant is entitled to damages based on the difference between his present position and the position he would have been in had he not relied on the defendant's statement, i.e. the reliance measure.1 With respect to the damages for negligent misrepresentation, there has never been any doubt that the appropriate measure of damages is the tortious measure.2 On the basis of section 2(1) of the Misrepresentation Act 1967, damages must be awarded for negligent misrepresentation as if the misrepresentation was made fraudulently. At this point, it becomes important to be aware that section 2(1) of the Misrepresentation Act 1967 applies to misrepresentations which induce the representee to contract with the representor. As already mentioned in subsection 4.4.3, these misrepresentations are made in a contractual context. During the negotiations, one of the eventaal contracting parties makes representations which after the conclusion of the contract seem to be misstatements. Because of the legai fiction of fraud in section 2(1), notions such as remoteness of damage that restrict damages in negligence to foreseeable losses are not applicable. The Court of Appeal held in Royscot Trust v Rogerson3 that damages in actions brought under section 2(1) of the Misrepresentation 1967 must be awarded on the same principles as damages for fraudulent misrepresentation. A defrauded claimant may recover for any loss he may suffer directly flowing from the fraudulent inducement, even if that loss was not reasonably foreseeable.4 The same principle is applied to the statutory negligent misrepresentation claim.

An alternative interpretation of section 2(1) of the Misrepresentation Act 1967 is that the only purpose of this Act was to give a person induced by a misrepresentation that is not a part of the contractual terras, an action for negligent misrepresentation besides an action for fraudulent misrepresentation.5 In that case, the damages are restricted to foreseeable losses.6

In prospectus liability cases, it is common that the misrepresentations are made by another party than the contractual party. As already mentioned in subsection 4.4.1, the issuer makes misrepresentations in its prospectus, while the counterparty to the sales contract with the investor is most likely to be one of the baraks that take over the securities to be sold from the issuer. In these cases, the investor cannot claim on the basis of section 2(1) of the Misrepresentation Act 1967 against the issuer. He has to claim damages on the basis of the common law action for negligence. If the claimant claims damages for negligent misrepresentation when there is no contractual relationship between him and the defendant, the remoteness of damages determines the measure of damages.

The term remoteness refers to causation in law as well as to the scope of protection afforded by the law. Causation in law (also known as: 'normative causation', `remoteness', 'adequate cause', `legai cause' or `proximate cause') deals with the question whether the defendant in the eyes of the law caused the particular loss to the claimant. Causation in law is a normative concept; it deals with the question whether the defendant is responsible for the specific losses incurred by the claimant.7 The exact scope of protection afforded by the law deals with the issue whether the law protects the claimant from the particular loss he has suffered. The burden of proof for botte questions is on the claimant.8 The claimant has to prove that a given loss was the result of the defendant's tortious behaviour.9 The court may infer causation from the facts. The question of causation crises at two quite distinct stages:10

The matter of causation is subdivided in a cause in fact and a cause in law. A cause is fact is dealt with by application of the `but for'- or condicio sine qua non-test: the defendant's wrongful conduct is a cause of the claimant's loss, if such loss would not have occurred without it: but for it.11 In general, the claimant has to prove, on a balance of probabilities,12 that his loss was in fact a consequence of the defendant's breach of duty. The cause in law deals with questions like direct consequences and new intervening forces that broke the chain of causation.13 With respect to the direct consequences, the Judicial Committee of the Privy Council laid down in The Wagon Mound14 case that the test of the extent of liability in tort for negligence should be the same as the test of its existence, namely reasonable foreseeability.15

Furthermore, damages in the tort of negligence can only be awarded if the damage to the claimant falls within the scope of the duty owed to him. On the one hand, the consideration of scope of duty is so fundamentally important that in fact the courts must consider it before the question of causation. On the other hand, the question on the scope of duty is so intertwined16 with the question of cause in law that it can also be discussed at this point.

The rule that the amount of damages for the tort of negligence is limited by the scope of duty was eloquently described by Lord Hoffmann in his speech in the Banque Bruxelles Lambert v Eagle Star Insurance Co17 case (commonly referred to as the SAAMCO case). In SAAMCO, mortgagees had suffered severe losses after lending on the basis of a negligent over-valuation of the property mortgaged. Part of the losses was incurred by reason of the valuers' over-valuation, but largely on account of the collapse of the UK property market in the early 1990s. It was held by the House of Lords, and thereby overruling the Court of Appeal, that the valuers were only liable for the loss resulting from the over-valuation: the difference between the value as stated by the valuer and the actual value at the date of valuation. The loss arising from the collapse of the property market was not within the scope of duty owed by the valuers. Lord Hoffmann ruled that: `[t]he real question in this case is the kind of loss in respect of which the duty is owed.'

As already mentioned in section 4.6.3.2.2, hard and distinct rules on the scope of duty cannot be laid down. Each particular case must be evaluated on its own merits. For example, the House of Lords held in Aneco Reinsurance Underwriting v Johnson & Higginsin18 where brokers had failed to effect valid insurance, that the brokers are liable not just for the loss resulting from their failure to insure their clients properly but also for the much greater loss resulting from their client having no reinsurance at all. In Thomson v Christie Manson & Woods Ltd,19 the defendant auctioneers had described in their sale catalogue a lot comprising two vases as Louis XV. At trial, the judge held that they were negligent in not warring the claimant purchaser that there could be some doubt about the vases' provenance; the catalogue should have described them as `probably Louis XV' instead. With the respect to damages, the trial judge held the auctioneers liable for the difference between the price paid by the claimant and the actual value of the vases, taking into account the uncertainties about them which were known at the moment of trial. The Court of Appeal overruled and reversed the decision on liability. Nevertheless, it passed on to the issue of damages and overruled the trial judge on this part as well. It held that the correct measure is to be the difference between the price paid and the value the vases would have had at the time of the auction, if they had been correctly described as probably Louis XV or, if the claimant had been properly advised that they were probably Louis XV. On this basis the claimant would not have suffered the loss that a sale by her would now bring about. However, note that this was exactly the factor not to be taken into account in the line of reasoning in SAAMCO. In that case, it was ruled that the subsequent fall in the market price was also not to be compensated for by the defendants.

Applying the SAAMCO ruling to prospectus liability cases leads to the conclusion that the investor can only recover damages for the difference between the price paid (the inflated price) and the actual value of the securities at the day of acquisition thereof by the claimant. The losses incurred as a result of the fall in the general stock market prices cannot be recovered by the claimant. Only in case of rescission of a contract, the claimant can obtain the price paid for the securities without subtracting the general fall in the securities price.20