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Smith v. Bolles

Supreme Court of the United States
10 S. Ct. 39, 1889 U.S. LEXIS 1849, 132 U.S. 125 (1889)
ELI5:

Rule of Law:

In an action for deceit or fraudulent inducement, the measure of damages is the plaintiff's actual out-of-pocket loss proximately caused by the fraud, not the speculative 'benefit of the bargain' or the value the property would have had if the representations were true.


Facts:

  • The defendant, Bolles, made certain representations to the plaintiff, Smith, concerning the value and nature of shares of stock in a company.
  • Relying on Bolles's representations, Smith was induced to purchase 9,525 shares of stock.
  • Smith paid a total of $16,050 for the stock.
  • Smith also acquired the legal claims of other individuals who were similarly induced by Bolles to purchase the same stock.
  • The representations made by Bolles were determined to be false and fraudulent.
  • The stock purchased by Smith was either entirely worthless or had a value substantially less than what he paid.

Procedural Posture:

  • The plaintiff, Smith, sued the defendant, Bolles, in a federal trial court for damages resulting from fraudulent inducement to purchase stock.
  • The case was tried before a jury.
  • The trial court instructed the jury that the measure of damages was the 'benefit of the bargain': the difference between the contract price and what the stock would have been worth if it had been as represented.
  • The jury returned a verdict for the plaintiff in the amount of $8,140.
  • The defendant, Bolles, appealed the judgment to the United States Supreme Court, challenging the trial court's jury instruction on the measure of damages.

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Issue:

In a case of fraudulent inducement to purchase stock, is the correct measure of damages the 'benefit of the bargain' (the difference between the contract price and the value the property would have had if it had been as represented)?


Opinions:

Majority - Mr. Chief Justice Fuller

No. In an action for fraudulent inducement, the measure of damages is the actual loss sustained by the plaintiff as a direct result of the fraud. The court reasoned that the suit was not for a breach of contract, where the plaintiff might be entitled to the benefit of the bargain, but for a tort (deceit). The purpose of tort damages is to compensate for loss, not to award the plaintiff the 'expected fruits of an unrealized speculation.' Therefore, the proper measure is what the plaintiff lost by being deceived, which is the money paid for the stock, plus any other direct consequential losses, minus the actual value (if any) of the stock received. The contract price is relevant only to establish the amount of loss, not as a benchmark to be compared with the represented value.



Analysis:

This case establishes the 'out-of-pocket' rule as the standard for measuring damages in common law fraud cases under federal law, contrasting it with the 'benefit of the bargain' rule often applied in contract law. The decision solidifies the distinction between tort remedies, which aim to make the injured party whole, and contract remedies, which aim to give the non-breaching party the benefit of their agreement. This precedent significantly influences the calculation of damages in securities fraud and other misrepresentation claims by focusing on actual, tangible losses rather than speculative, expected gains, thereby limiting the potential recovery for plaintiffs.

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