A Case of Interest?

By David Debenham

In the normal case, the plaintiff’s damages are determined as of the date of breach of contract or breach of duty and pre-judgment interest is used to compensate the plaintiff for time value of money between the date of breach and the date of trial.  [1]

Now consider the case where a fraudster has underpaid for an item due to his deceit.  The victim is entitled to damages, plus interest on the money he should have been paid if the misrepresentations had not taken place less what was actually paid.  However, should there be pre-judgment interest credited to the fraudster for the money that was actually paid as well?  In Tuke v, Hood[2] the English Court of Appeal considered the suggestion that credit should be given for the time value of the money, measured as notional interest, to be fundamentally misconceived, contrary to principle, and bad policy.  “the upshot of requiring such credit to be given would be to reduce the recoverable damages the longer the fraud went undetected, and thus to allow a dishonest defendant to benefit from the concealment of his fraud or dishonest assistance in a breach of fiduciary duty.  It would also be contrary to the fundamental aim of fully compensating a victim of fraud for all the loss directly flowing from the fraudulent transaction, including consequential loss.  Far from being overcompensated, [the victim] would not be fully compensated if he were to be required to give any credit for the time value of the money he received.”

Let us see why this must be so.  Let us consider the case where I own 2 cars, one worth $5,000 and the other $10,000.  The fraudster persuades me to sell the second car for $2,000 for the second car by telling me that the car is not road worthy when he knows it is.  What is my loss?  Why, it is $8,000 of course.  If the first car appreciates by $5,000 it does not mitigate my loss related to the second.  So too the $2,000 I received is not a benefit that offsets the $8,000 I actually lost: It simply reduces the amount of my loss.  If the aim is to put the injured party in the position that he would have been in if the fraud had not occurred, that aim is generally achieved by ensuring he gets back the value, in money terms, of what he parted with.  So, for example, if he is fraudulently induced to sell an asset worth $10,000 for $2000, he is compensated by an award of $8,000 because, by keeping the $2,000, he has received $10,000 in total.  If he also had to give credit for interest notionally (or even actually) earned on the $2,000 he would be under-compensated, because he would receive less than the full $10,000 that the asset was worth at the time of sale.  The notional interest to be earned in future is not part of the value he receives for the asset from the purchaser, nor is it properly described as a benefit conferred on him by the sale transaction.

The longer the delay in the award of the $8,000, the greater the amount of that under-compensation would be.  The difference would not be eliminated by an award of interest on the $8,000 because that reflects the loss of use of that sum from the date on which it should have been paid to the injured party.  It is not difficult to envisage circumstances in which the supposed “benefit” might wipe out the loss altogether.  There is no difficulty in concluding, therefore, that a claim for credit for the “time value” of the money received as consideration for the sale should not be allowed as part of the basic award of damages.

Now suppose that the asset sold at an undervalue was bought as an investment, and by the time the balance of the $10,000 (i.e.  the $8,000) is awarded, the asset is worth $25,000 and the injured party proves that he would have kept it but for the misrepresentation that it was not road worthy.  The consequential loss is $15,000, which is the difference between the $25,000 (i.e.  what the asset would now be worth if he had not sold it to the fraudster) and the $10,000, which is what it was worth when he did sell it to the fraudster.  If the victim receives the $15,000 on top of the £6,000 basic damages, he is put in the position in which he would have been but for the fraud (i.e.  when the $2,000 paid to him for the asset is taken into account, he has received in total $25,000).  The fact the claimant gets the base value of the asset at the time of sale restored to him by a combination of the $2,000 he retained plus the $8,000 damages, has nothing to do with the further $15,000, which measures the lost capital appreciation of the asset between the date of the sale and the value at the time when it would otherwise have been sold (or value at trial).  There is no logical basis for suggesting that the claimant would be over-compensated if he receives that additional $15,000 without credit being given for the “time value” of the $2,000, because that $2,000 has already been subsumed in the valuation of $10,000 which forms the starting point for the claim for lost capital appreciation.  If there is no principled reason for requiring interest on the $2,000 to be offset against the $10,000 valuation when that is calculated, there is even less justification for requiring it to be offset against the $15,000.  Any such offsetting will result in the injured party receiving less than the $25,000 which puts him in the position he would have been in but for the fraud.

As a matter of principle, the question to be asked is whether the claimant is unjustly enriched by keeping a benefit rather that giving a credit to the wrongdoer.  Let us say that victim of the fraud goes to a casino with the $2,000 and doubles his money.  Instead of interest, should the fraudster be credited with $4,000 instead?  The answer must be “no”, just as if the first car was sold to a third party for twice what it was worth.  There simply is no unjust enrichment (deprivation of the fraudster) associated with the remaining $2,000.  So too if the claimant had lost the $2,000 at the Casino, he could not add that loss to his claim against the fraudster. 

The court confirmed that all that the innocent party is required to do, in order to reflect the position as it would have been if the deceit had not occurred, in a case where the measure of damages is reflected by comparing the value of what was sold with the value of what was received, is to give credit for the money (or money’s worth) he received under the transaction itself.  This does no injustice to the fraudster, who only pays interest on the difference between the market value of the item sold and what the innocent party received for it.  No further credit has to be given for a notional amount of interest on that money even if there is a claim for consequential losses in which the starting point for the assessment is the market value of the item at the date of the sale.  To do otherwise, encourages the fraudster to delay the proceedings in an effort to increase the value of the credit “earned” as a result of the time value of money. 

[1] Tuke v Hood [2022] EWCA Civ 23

[2] Kinbauri Gold Corp.  v.  Iamgold International African Mining Gold Corp., 2004 CanLII 36051 (ON CA)