Court of Appeal

The Court of Appeal awarded £1,196,010 in damages to reflect the difference between what was paid and the market value at the date of purchase.

House of Lords

Lord Browne-Wilkinson held that Smith New Court was entitled to the full loss of £11.3m. He laid down seven principles as follows:

(1) the defendant must make reparation from all damage coming directly from the transaction

(2) foreseeability is irrelevant

(3) the full price paid can be recovered, minus any benefits he received resulting from the transaction

(4) a general rule is that benefits include market price as at the date of acquisition, but this is not to be inflexible to prevent full compensation

(5) that general rule does normally not apply when misrepresentation continues to operate after acquisition, inducing the claimant to retain the asset, or the claimant is locked into holding the property by reason of the fraud

(6) consequential loss is recoverable...

(7) ...subject to mitigation once fraud is discovered.

Smith would only have paid for an acquisition as a market making risk. As such, Smith could not dispose of them on 21 July 1989 otherwise than at a loss. Smith were in a special sense locked into the shares…

Lord Steyn asked,

whether there is a justification for differentiating between the extent of liability for civil wrongs depending on where in the sliding scale from strict liability to intentional wrongdoing the particular civil wrong fits in. It may be said that logical symmetry and a policy of not punishing intentional wrongdoers by civil remedies favour a uniform rule. On the other hand, it is a rational and defensible strategy to impose wider liability on an intentional wrongdoer… as between the fraudster and the innocent party, moral considerations militate in favour of requiring the fraudster to bear the risk of misfortunes directly caused by his fraud. I make no apology for referring to moral considerations. The law and morality are inextricably interwoven.

Lords Keith, Slynn and Mustill concurred.