Introduction

The UK Court of Appeal has recently handed down a judgment in the case of OMV Petrom SA v Glencore International AG [2016] EWCA Civ 778 to dismiss a fraudster’s appeal against the quantum of damages which was determined earlier by the lower courts.  The decision had clarified the approach that courts will take to calculate the measurement of damages, and had shed light on whether subsequent events occur after a fraud shall be taken into account for the purpose of assessing the extent of the defrauded party’s loss. 

The Facts

OMV Petrom SA (“OMV”) is a Romanian oil company. It is the successor in title of another Romanian oil company which had purchased crude oil from Glencore International AG (“Glencore”) (and its predecessor Mark Rich & Co AG).  The actual importation of crude oil was organised by an agent named Petrolexportimport SA (“Petex”).  Pursuant to the supply contracts entered into between Glencore and Petex, Glencore was to supply Petex with blends crude oil of Iranian Heavy, Gulf of Suez Mix and Urals (the “Recognised Blends”).  Between 1993 and 1996, Glencore made 80 shipments to Petex but in 32 of these shipments Glencore delivered its own crude oil (the “Counterfeit Blends”) through Eilat Ashkelon Pipeline Co to resemble Iranian Heavy and Gulf of Suez Mix at a lower cost. The Counterfeit Blends comprised of cheaper crudes from Egypt, Nigeria and Yemen. The Counterfeit Blends were subsequently sold into Romania with false documentation asserting that they were genuine Iranian Heavy and Gulf of Suez Mix.

After knowing the truth, OMV commenced legal proceedings against Glencore for deceit.  Glencore was held liable in deceit by the High Court. The Trial Judge awarded damages equivalent to the difference in value between the Recognised Blends and the Counterfeit Blends to OMV. Glencore appealed against the quantum of damages.

Glencore’s Major Arguments

At the Appeal, Glencore sought to challenge the Trial Judge’s method of measurement of damages on the basis that the discount applied by the Trial Judge on the value of the Counterfeit Blends (i.e. $1 per barrel) was wrong in that the risks which were said to justify the discount had not in fact materialised. In other words, Glencore argued that subsequent events which took place after the breach should be taken into consideration in the calculation of damages. As such, the damages should be reduced as the Counterfeit Blends had not caused any damage as a result their usage and the performance of the Counterfeit Blends was not greatly inferior to that of the Recognised Blends.

The Ruling

To start with, the Court of Appeal took the opportunity to consider the leading case on measurement of damages in fraud cases – Smith New Court Securities Ltd v Scrimgeour Vickers (Asset Management) Ltd [1997] AC 254. Applying Smith New Court, it held that as a matter of principle, the basic measure of damages is “the price paid less the benefits received as a result of the transaction, as at the date of acquisition” (in the present case, the date of acquisition was agreed to be the bill of lading date).

That said, such general principle is not to be applied inflexibly where to do so would prevent the defrauded party from obtaining full compensation for the wrong suffered, as emphasized by Lord Browne-Wilkinson in Smith New Court.

Applying Smith New Court, the Court held that it was appropriate for the Trial Judge to give a discount against the purchase price of the Counterfeit Blends when assessing damages, as no one would have bought them at market value at the relevant time.  The fact that such risks (i.e. suffering damages for using the Counterfeit Blends) did not materialise did not alter the fact that OMV was induced to pay too much at the time.

As such, the Court rejected Glencore’s arguments and held that Glencore's proposed method of assessment of damages is erroneous, for the following reasons:

1.       It involves taking into account risks which did not materialise after the bill of lading date in order to eliminate the discount which purchasers at that date would have required in the light of those risks. It is not, in other words, an assessment of the value of the Blends at the date of acquisition.

2.       Acceptance of Glencore’s argument would mean that Glencore had recovered a price for the sale of the Counterfeit Blends which it would never have recovered if it had been honest.

3.       It is not apparent that there were no damaging consequences of using the Counterfeit Blends. Glencore should have pleaded and proved so if it is to contend the events taken subsequent to the breach had reduced OMV’s recoverable loss.

As a result, the Court of Appeal unanimously dismissed the Glencore’s appeal and upheld the Trial Judge’s ruling that the damages for which Glencore had to pay OMV should reflect the risks and uncertainty surrounding the Counterfeit Blend which a hypothetical purchaser would have taken into account as at the date of purchase. 

Conclusion

The decision illustrates that the rules governing the calculation of damages are not to be applied inflexibly, and a departure may be justifiable to ensure that an innocent party is not undercompensated such that it cannot be relied on by a fraudster to reduce their liability. In particular, the Courts will be unwilling to take subsequent events into account where that would give the fraudster a windfall.

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Important: The law and procedure on this subject are very specialised and complicated. This article is just a very general outline for reference and cannot be relied upon as legal advice in any individual case. If any advice or assistance is needed, please contact our solicitors.