Материал: Amy C Kläsener

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contractual caps to expressly state that they do not apply where breaches of warranty result from fraud.Where the facts and evidence support it, a fraud claim will therefore provide a route to uncapped liability and increase the measure of damages available to the claimant.

Claims for fraud under English law are based on the tort of deceit. A party will incur liability where it intentionally makes a misrepresentation to another person, which induces that person to act in a way they would not otherwise have acted and they suffer loss as a result.The representation must relate to a matter that would influence a reasonable person deciding whether, or on what terms, to enter into a contract or complete a transaction.21 To qualify as an actionable misrepresentation, a statement must be one of existing fact. Difficulties can occur when this is not the case, as in the following examples.

•Statements of opinion or belief: some kinds of sales talk are so vague as to have no legal effect. A statement of opinion or belief can, however, give rise to liability if the seller professes to have special knowledge or skill with regard to the matter stated,22 or if the statement by implication contained a representation that the person making it held the belief stated.23 A person who makes a statement of expectation or belief about future events may similarly by implication represent that he or she holds the belief on reasonable grounds,24 or at least honestly.25

•Statements that become false: a representation may be true at the time it is made, but subsequently become false. If a person becomes aware of facts or circumstances that falsify the representation before it has been relied on, they must correct the representation or risk exposure to liability for misrepresentation.

•Where there is a positive duty to disclose a material fact, failure to do so can also constitute fraud.The English Court of Appeal has held that, when there is a positive duty to disclose,26 non-disclosure is tantamount to an implied positive representation that there is nothing relevant to disclose.That implied representation can be used to found a claim for fraud.27

The key ingredient that sets fraudulent misrepresentation apart from other types of misrepresentation is dishonesty.That will be made out if the claimant can show that the person making the statement either knew that it was false or had no belief in its truth or made it

21McDowell v. Fraser (1779) 1 Dougl 260, 261; Traill v. Baring (1864) 4 DJ & S 318, 326.

22Esso Petroleum Co Ltd v. Mardon [1976] QB 801.

23Brown v. Raphael [1958] Ch 636, 641.

24The Mihalis Angelos [1971] 1 QB 164, 194, 205.

25Economides v. Commercial Union Assurance Co plc [1998] QB 587.

26Which may, for example, arise contractually after the contract is signed, in the period between contracting and completion.

27Conlon v. Simms [2006] EWCA Civ 1749 at [130].

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recklessly, not caring whether it was true or false.28 They need not establish an intention to cause loss or other bad motive.29 An ‘intention to deceive’ suffices even though there is no ‘intention to defraud’.30

In the M&A context, examples of matters heard before the English courts include falsification of financial reporting31 and the provision of sales forecasts to a buyer, which the seller’s representatives learned could no longer be justified.32

The case of Erlson v. Hampson33 is a good illustration of the principles set out above. In that case, the buyer was provided with financial information showing historic and forecast sales performance. Performance was broken down by customer, such that it was clear that a substantial proportion of anticipated future revenue was based on sales to a small number of material customers. The chief executive of the seller (who was also a director of the target) was told that a material customer intended to terminate its relationship with the target, but did not inform the buyer.The share purchase agreement contained exclusions of liability for negligent misrepresentation and the warranties were not engaged; however, the case for fraud succeeded.The forecasts were statements of opinion (because they represented expectations about future performance, not present fact), but the court held that they contained implied representations of fact that the seller had reasonable grounds for, or knew of facts that justified, the forecasts.When the chief executive learned that the material customer was terminating its relationship with the target, those implied representations became false and should have been corrected. However, the chief executive stayed silent and did not correct them.The court found he had been dishonest, the claimant succeeded, and the contract of sale was rescinded.34

Burden of proof

‘Generally . . . ​a plaintiff or applicant must establish the existence of all the preconditions and other facts entitling him to the [judgment or] order he seeks.’35 And so the basic rule is that the party who asserts a proposition bears the burden of proving that issue (this applies to both court proceedings and arbitration).36 The standard of proof required in this context is proof on the balance of probabilities.

28Derry v. Peek (1889) 14 App Cas 337.

29Polhill v.Walter (1832) 3 B & Ad 114.

30Standard Chartered Bank v. Pakistan National Shipping Corp [1995] 2 Lloyd’s Rep 365, 375; Standard Chartered Bank v. Pakistan National Shipping Corp (No 2) [2000] 1 Lloyd’s Rep 218, 221, reversed on another ground [2003] 1 AC 959.

31Hut Group Ltd v. Nobahar-Cookson [2014] EWHC 3842 (QB).

32Erlson Precision Holdings Ltd v. Hampson Industries Plc [2011] EWHC 1137 (Comm).

33ibid.

34As to rescission, see ‘Remedies’, below.

35Re H & R (Minors) (Sexual Abuse: Standard of Proof ) [1996] AC 563, 586, per Lord Nicholls.

36N Blackaby and C Partasides (eds), Redfern and Hunter on International Arbitration (6th edn, 2015) at para. 6.84. In other words, the burden will generally fall on the defendant to prove the elements of any defence relied on to defeat a claim.

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Knowledge sharing

The circumstances when the knowledge of the management of a target will be attributed to the seller are complex, and it is difficult to provide guidance at anything other than a high level of generality; whether knowledge can be attributed is very much fact-dependent.

In sophisticated contracts there are sometimes clauses that expressly deal with knowledge sharing, attribution and disclosure. In such circumstances, this issue will be determined by the express terms of the contract. Otherwise, the inquiry is more subtle and fact-sensitive.

In Meridian Global Funds Management Asia Ltd v. Securities Commission,37 Lord Hoffmann pointed out that the rules by which the acts and omissions of natural persons are attributed to a company depend on the proper interpretation of the policy underlying the substantive rules of law to which they relate. He said:

But there will be many cases in which . . . the​ court considers that the law was intended to apply to companies and that, although it excludes ordinary vicarious liability, insistence on the primary rules of attribution would in practice defeat that intention. In such a case, the court must fashion a special rule of attribution for the particular substantive rule.This is always a matter of interpretation: given that it was intended to apply to a company, how was it intended to apply? Whose act (or knowledge, or state of mind) was for this purpose intended to count as the act, etc. of the company? One finds the answer to this question by applying the usual canons of interpretation, taking into account the language of the rule (if it is a statute) and its content and policy.38

This discussion is framed in terms of the language of a rule, but a similar approach applies where the question of attribution arises in the context of a contractual clause.39 The Court of Appeal considered the attribution question in Jafari-Fini v. Skillglass Ltd, in which Lord Justice Moore-Bick said:

In the context of an obligation which arises under a contract the task of identifying the natural persons whose knowledge or state of mind is to be attributed to the company for the purpose of that obligation can easily be identified as one of construing the contract. It is therefore necessary to ask who among PAL’s directors, employees and agents did the parties intend should be regarded as the company for the purposes of acquiring information that must be disclosed.40

That case concerned whether knowledge of a bribe paid by a third party, but known to a director at Phoenix Acquisitions Ltd (PAL), could be attributed to PAL for the purposes of a default clause under a lending facility.The capacity in which the knowledge was acquired is an important factor.41 Several relevant principles can be gleaned:

37[1995] 2 AC 500.

38At 507D-F.

39Hut Group Ltd v. Nobahar-Cookson [2014] EWHC 3842 (QB) at [226].

40[2007] EWCA Civ 261 at [97].

41Jafari-Fini v. Skillglass Ltd [2007] EWCA Civ 261 at [92].

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•The role that the management (or employees of the target) take in the acquisition can be a material consideration in whether knowledge is attributed to the sellers. If the members of the management are active and involved, then attribution to the sellers will be more likely.42

• Similarly, the role the individuals play within the management of the company can be a material consideration.The more actively involved they are in the day-to-day management of a company (e.g., by nominating and receiving reports from people in key management positions), the more likely they are to be attributed with knowledge of the business.

Although the principles above are not derived from cases dealing directly with the attribution from target to seller, similar principles would apply when assessing whether such attribution should occur. In practice (and in the absence of any contractual provisions dealing expressly with knowledge attribution), the question will be determined by reference to the relevant contractual provision and the degree of the connection between the relevant target employee and the transaction.

Remedies

In the majority of misrepresentation or breach-of-contract arbitrations, the claimant will seek damages as the primary remedy.43

Where a misrepresentation has induced a contract, the contract can be rescinded (or unwound) at the election of the claimant or by order of the court or tribunal44 (though, in practice, an order will usually be necessary).45

Rescission is barred where:

•the claimant has affirmed the contract by unequivocally manifesting an intention to continue with it after knowledge of the misrepresentation.Affirmation may be express or inferred from conduct;46

•a third party is a bona fide purchaser for value of property transferred under the contract without notice of the factor rendering the contract voidable;47

•restitution by the claimant to the counterparty of benefits conferred on the claimant by the counterparty is impossible;48 or

•the claimant has delayed too long in seeking rescission. Where the representation is fraudulent, lapse of time is not itself a bar to rescission.

42In the context of attributing knowledge of fraudulent activity by a director to the buyer based on this factor, see Hut Group Ltd v. Nobahar-Cookson [2014] EWHC 3842 (QB) at [282] (affirmed on other points [2016] EWCA Civ 128).

43Measure of damages is considered in the next section.

44Claims for rescission can be made alongside, or as an the alternative to, a separate claim for damages.

45Rescission at common law may be effected by the claimant clearly communicating its election to rescind the contract to the defendant. If a claimant seeks rescission at equity, however, an order of a court or tribunal is necessary.The distinction between rescission at common law and at equity is largely academic since an order will generally be sought in any event where the right to rescind is disputed.

46Clough v. London and North Western Railway (1871) LR 7 Exch 26.

47Cundy v. Linsay (1878) 3 App Cas 459.

48Halpern v. Halpern [2007] EWCA Civ 291.

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Section 2(2) of the Misrepresentation Act 1967 gives the court or tribunal discretion to award damages ‘in lieu of rescission’49 where the misrepresentation is trivial, wholly innocent or rescission would cause undue hardship.50

Specific performance is also available, in theory, where damages would be inadequate to compensate the claimant.Whether damages are inadequate is highly fact-sensitive. For example, if the deal involves buying shares in a public company, then damages will generally be adequate as there is an available market. However, if the company is private, then the lack of a market may mean that damages are inadequate.The uniqueness and nature of the target business will also play a factor.An important point to note is that if the contract still has conditions precedent that need to be fulfilled (e.g., gaining regulatory approval), then specific performance will not be available.51

Injunctive relief is also available and can be ordered by tribunals on an interim or final basis, where appropriate.

Measure of damages

In the overwhelming majority of cases, damages awarded under English law are compensatory rather than punitive.52 The extent of loss is, in practice, typically the subject of detailed expert evidence.

The measure of damages will differ depending on whether the buyer brings the claim in contract or in tort.53 The basic principle for compensating losses caused by tort (which applies in cases of fraudulent or negligent misrepresentation) is that tribunals will seek to put claimants in the position they would have been in had the tort not occurred – for example, the position a buyer would have been in had it not been induced to enter the sale contract. Damages in that case would be assessed by calculating the difference between the amount the buyer paid for the business and its actual value. Contractual damages, on the other hand, are quantified by reference to the position the claimant would have been in had the contract been performed correctly.Where the claimant had a contractual right not to proceed with the transaction, this may involve an inquiry into what the claimant would have done instead and the claimant may be entitled to damages to put it into the position it would have been in had it not proceeded with the transaction. Conversely, if the claimant would have proceeded with the transaction, the inquiry will focus on the difference between the value the claimant would have received if the contract had been correctly performed and the value the claimant actually received.

49In other words, to order that damages should be awarded in circumstances where the representee would be entitled to rescind a contract.

50There are conflicting first instance authorities on the question of whether damages are still available even if rescission is barred by one of the four bars set out above. In favour of the view that a rescission bar also bars a s.2(2) claim, see Government of Zanzibar v. British Aerospace [2000] 1 WLR 2333. In favour of the opposite view, see Thomas Witter Ltd v.TBP Industries [1996] 2 All ER 573.

51Chattey v. Farndale Holdings [1997] 1 EGLR 153.

52Punitive damages can, in theory, be awarded under English law, but this only happens in very exceptional circumstances.

53As noted in ‘Grounds for M&A arbitrations’, above, misrepresentation claims (whether under the Misrepresentation Act 1967, at common law or for deceit) are tortious claims.

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