Damages in Fraud Claims

By Nicholas Scott and Eleanor Hassani, Memery Crystal

In the recent case of OMV Petrom SA v Glencore International AG [2015] EWHC 666 (Comm), Flaux J, sitting in the Commercial Court, had to determine the correct measure of damages in a case where the seller, Glencore, had fraudulently delivered crude oil of a blend which differed from that specified in the contract. The Court determined that the correct measure of damages was the difference between the price paid for the shipments and the actual value of what was delivered as at the date of delivery. Although the case arises in the context of oil trading, the principles are applicable to all fraud claims, regardless of subject matter.

Speed read

1) The victim of a fraud is entitled to be compensated for all loss flowing from its reliance on the false statement (i.e. the victim should be put in the same position as if the fraudulent statement had not been made). Unlike other torts, there is no remoteness limit on recoverable losses; any losses which directly flow from the false statement are recoverable, and such losses can include consequential losses.

2) OMV Petrom SA demonstrates that the Court will not apply contractual damages principles to calculate damages in a fraud claim. Glencore had argued for a departure from the usual method of calculating loss, and said damages awarded should be the difference between the less valuable yield derived from refining the blends delivered and the yield which would have been derived from refining the contractual grades of crude oil. This Sale of Goods type argument was rejected.   

3) A victim of fraud must, notwithstanding the fraud, give credit for any benefit it has received from the fraudulent transaction. In general, the benefits received by the innocent party will include the market value of what was acquired on the date of acquisition. This will not apply in all cases, and it may sometimes be appropriate to value the benefit on some later date. However, OMV Petrom SA demonstrates that any departure from the usual rules is to ensure that an innocent party is not undercompensated, and cannot be relied on by a fraudster in order to reduce their liability.   

4) The victim of a fraud has a duty to mitigate their losses wherever possible.

Facts

In this case, the buyer, SC Rafirom SA (“Rafirom”), had purchased approximately 80 shipments of crude oil from Glencore through an agent, Petrolexportimport SA (“Petex”), and imported it into Romania between 1993 and 1996. The contract stated that the crude oil would be of the grades Iranian Heavy and GOSM, and the shipments came with documents, which stated that the cargoes were Iranian Heavy or GOSM. Despite this, some of the cargoes consisted of other crude oil blends.  On discovering this, Petrom, which was by this stage the successor in title to Rafirom, brought an action against Glencore alleging deceit.

Glencore accepted that it had acted fraudulently, but said that the agent had been aware of the fraud at the outset, and had entered into the contract regardless because of shortages of crude oil in the market. Glencore argued that the representations were made to Petex and were not intended to be repeated to Petrom, or alternatively that they were “spent”. The Court dismissed these arguments and upheld Petrom’s clam, and one question which arose was how damages should be assessed.

Petrom argued that on the basis of Smith New Court Securities Ltd v Citibank NA [1997] A.C. 254, damages were the difference between the price paid for the shipments and the actual value of what was delivered, which amounted to approximately $47,000,000. In contrast, Glencore submitted that the correct measure was the difference between the less valuable yield derived from refining the blends delivered and the yield which would have been derived from refining the contractual grades of crude oil. Glencore submitted that this should be measured by comparing the Gross Product Worth of each blend actually supplied with the Gross Product Worth of the respective contractual grades, and calculated the loss suffered as $6,000,000.

Flaux J rejected Glencore’s submissions for the following reasons:

1) The real loss suffered by Rafirom was the full price paid as induced by the deceit, giving credit for the actual value of the blends, irrespective of what Rafirom did with the blends.  

2) Glencore had argued that calculation of Rafirom’s damages should be on the basis of contractual damages and that effectively they should only receive damages based on the lower profit. This argument was misconceived as it does not take into account the fact that as a consequence of the fraud, the buyer has paid more for the non-contractual specification crude oil than he would have done if he had known the truth, and the loss is the difference between the price paid and the actual value of what was delivered.

3) A fraudster is not entitled to depart from the normal measure of loss for deceit calculated in accordance with the Smith New Court principles by saying that the benefit received by the innocent party should be assessed at a later date than the date of the transaction. Any departure from the usual date of valuation is to ensure that the victim of a deceit recovers full compensation for the loss suffered, not to benefit a defendant who has committed a deceit by offering them a means of avoiding full compensation for the loss suffered.

4) Glencore’s arguments based on damages awarded in contract cases concerning the sale of goods act were not relevant to the issue of what damages should be awarded in a case of deceit.


Nicholas Scott, Co-Head of Dispute Resolution
Memery Crystal LLP, 44 Southampton Buildings, London WC2A 1AP
T +44 (0) 20 7400 5823
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Eleanor Hassani, Solicitor, Dispute Resolution
Memery Crystal LLP, 44 Southampton Buildings, London WC2A 1AP
T+ 44 (0) 20 7400 3270
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published: August 2015

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