Ingredients for Tort of Deceit cook up a storm in the Court of Appeal

Case: Eco 3 Capital Ltd and others v Ludsin Overseas Ltd [2013] EWCA Civ 413

Background

This case involves two companies and 3 directors of those companies (the Defendants) who appealed against a Judgment holding they were liable to pay £1.4million as damages for the tort of deceit, which consisted of inducing Ludsin Overseas Ltd (the Claimant) to invest £2million in a project by misrepresenting crucial features of it.

Tort of deceit contains four ingredients: (1) Defendant makes a false representation to the Claimant; (2) Defendant knows that the representation is false or is reckless as to whether it is true or false; (3) Defendant intends that the Claimant should act in reliance on it; and (4) claimant does act in reliance on the representation and, in consequence, suffers loss.

The phrase “intention to deceive” is merely another way of describing the mental element of the tort, set out in the second and third ingredients above, and is not a free-standing element.

Principle issues:

(i)            Whether the trial judge correctly identified and addressed all of the ingredients;

(ii)           Whether the Claimant’s claim was properly pleaded;

(iii)          Whether the Judge was correct to find that the First and Second Defendants had made fraudulent misrepresentations; and

(iv)          Whether the Judge was correct to find that in doing so, the First and Second Defendants were acting as agents for the Third, Fourth and Fifth Defendants.

Facts

The site at the heart of this issue had various problems with it such as a family owning a ransom strip and various restrictions on title.  It had previously been used as a gravel pit and later as a landfill site suffering some contamination as a result.

During June and July 2005 three of the Defendants spent time working on the details of the scheme with a view to raising capital and it was decided the financing of the project would be a mixture of money through investors and a bank loan.  One of the Defendants approached the Claimant on two separate occasions to discuss the project, at some point during which, the Claimant was informed that the increase in value of the investment was likely to be substantial and some very important English people were associated with or involved in the deal.  The Claimant was attracted to the deal as it appeared to be a short term arrangement with low risk and high reward.

A meeting was held on 18 July 2005 when one of the Defendants explained that he could overcome the problems attaching to the site, substantially increasing its value.

The three Defendants resolved to structure the acquisition by purchasing the site in the region of £9.5million through one company, which would also clear the site of any restrictions and then sell the site to another company controlled by them for £12.25million when an improved planning permission would be obtained making a profit of almost £3million.  The site with the improved planning permission would then be sold to developers at a further substantial profit.  The profit from the second transaction only would then be shared amongst all the investors in the project.

As the Claimant had only been made aware of the second transaction, unbeknown to him, his money had in fact had been used to fund the first purchase at the lower price of £9.3million.  Problems began to occur following the second transaction and there were delays in applying for planning permission.  During this period interest continued to accrue on the outstanding bank loan and in 2009 the company had ran out of money to meet the interest payments.  The Claimant was approached again to invest further monies but at this point declined to do so and the company went into liquidation.

On 29 June 2009 the receiver sold the site for £15million.  In fact, it was one of the Defendants’ other companies which purchased the site and later sold part of it for residential development at a price of £27million.

The Claimant subsequently filed a claim for damages and misrepresentation against the first five Defendants as well as seeking equitable relief for misuse of his £2million investment against the sixth Defendant.

The claim against the sixth Defendant settled prior to commencing proceedings and the other five Defendants were held joint and severally liable to the Claimant for damages of £1.4million.

The Defendants appealed to the Court of Appeal but the appeal was dismissed.